Foxconn Q&A Transcript

Transcript:

Ben: Hi. I’m Research Manager Ben Dressing, and with me is Chief Investment Strategist Alexander Green. First, we’d like to thank you all for sending in your questions about Foxconn. There were a ton of them, so let’s get into it.

Alex, a number of our customers have asked about Foxconn. You indicated that you expect a 31% increase for 2018 in Foxconn. However, it had a pretty tough second quarter. How does your forecast reconcile with those results, and what are the growth projections for Hon Hai Precision in the coming months or years?

Alexander: Alright, well, that’s a good question. Let me back up and begin by talking about what Foxconn is, in my view. It’s a backdoor play on the increasing, worldwide acceptance of smartphones. You know, we in the West take smartphones for granted. Virtually everyone we know has one. Some people can’t seem to get off of them –don’t get me started on my 15-year-old.

But when you think about it, a smartphone is not just a phone. It’s a watch, a stereo, a camera, a video camera, a voice recorder, an internet browser, a GPS tracker and a video teleconferencing device. It holds a vast library of books and films and games and music. And just 20 years ago, these things would’ve cost hundreds of thousands of dollars, so it’s a tremendous innovation that we take for granted now.

But that’s just us in the West. Actually, one-third of the world’s population has smartphones, but that means two-thirds – 4.9 billion people – don’t have one. But they soon will – they’ll have an iPhone, a Samsung Galaxy, a Google Pixel or whatever. And so, Foxconn is, as the largest contract manufacturer in the world, a big play on the worldwide penetration of the smartphone.

Now, getting back to the question about the earnings dip – this is a somewhat seasonal business, and the second quarter sales and revenue dip was not a big surprise. In fact, if you look at Foxconn’s history, it’s a regular occurrence. The company’s strongest performance always comes in the third and fourth quarters. My own projection is that, while second quarter earnings were $0.03 a share, it’s going to be $0.06 (double) in the third quarter and $0.09 (triple) in the fourth quarter. So we’re actually heading into the strongest season with the holidays just ahead.

So I’ll remind everybody that Foxconn is Apple’s primary assembler for its iPhone, and Apple is Foxconn’s biggest client. It brings in more than half the company’s total revenues. And

Foxconn is currently contracted to build most of the new higher-end phones that Apple just announced as well as 30% of the cheaper LCD models. And as a result, Foxconn’s revenues will hit in the fourth quarter when the new iPhones begin shipping for the holidays. And in fact, Apple expects 75 million units to ship by year-end. That’ll be the biggest sales volume for an Apple phone since the launch of the iPhone 6 many years ago. So we should see these developments play out in huge sales and earnings in the months just ahead.

Ben: So it sounds like good news is on the way. Now, Carl H. asked: How many years before this could be a big bucks style play? “I’m not doing anything yet,” he says, and he’s very hopeful for the future in the tech sector. But he’s also 67 years old – what’s his timeline for this?

Alexander: Well, I’m recommending this as a long-term play. I really can’t suggest strong enough that people resist the urge to take short-term profits if the stock has a sudden spike, or certainly to bail out if the company takes a dip.

I mean, think about this – if you’re planning to hold a stock for five, 10 or 20 years, would it matter what Apple did five years ago, what Amazon did 10 years ago or what Netflix did 15 years ago? It wouldn’t really matter. These are going to be little squiggles on a long line, looking back from a longer-term perspective.

So I really suggest that you not be thinking about when it’s going to make this move here and when it’s going to make this move there because it’s not a short-term play. It’s not a trading vehicle – it’s a stock to hold on to. And the idea, again, behind the Single-Stock Retirement Plan is that this stock could appreciate enough over the long haul to provide a very comfortable retirement.

To worry about what it’s doing this week, this month or next month is really beside the point. And if you got too excited about what the great stocks of the past had done and bailed out along the way, you clearly regretted it. So I’m suggesting now that Carl – and people like him who are thinking about when this stock going to move and how much and when – put that in the back of their minds and just enjoy the longer-term ride.

Ben: Right. This is a much bigger scope than a short-term play. And it does seem that the growth is going to be coming over time. So it sounds like Carl should be hanging on for the long term and this is going to be part of his portfolio for a while. Dale H. wrote in and asked why Alex keeps recommending people try and buy shares on the Taiwanese exchange versus the OTC shares under the symbol HNHPF.

Alexander: Alright, well, the reason I recommended buying on the Taiwan exchange is that it’s where the stock trades primarily. There’s more volume, and when there’s more volume, there’s more liquidity.

Remember, what’s happening is U.S. market makers are making a market in Foxconn, which trades under the name Hon Hai Precision in the U.S. during market hours here in the U.S. But during that time, the Taiwanese market on the other side of the world is closed. And here’s why you often see a discrepancy between the price in Taiwan and the price that the OTC market makers are making – those market makers are taking a risk. If Hon Hai makes a big announcement overseas and they don’t hear it, or they don’t speak Taiwanese and they’re caught on the wrong side of the trade, they could get burned. And so they tend to mark the stock up when investors are buying it, and they tend to mark the stock down when they’re selling it.

So you can buy the stock over the counter. I’d recommend that you buy it directly off of the Taiwanese exchange. Some brokers can do it, some can’t. I know that for instance, Charles Schwab can. If you see that the price is very close on the OTC market and that’s the only way you can buy it, great. Go ahead and buy it that way. But you will probably get a better execution and have more liquidity – you’ll definitely have more liquidity on the foreign shares than on the ADRs, which incidentally, are two for one. You get two of these foreign shares in each single ADR. ADR stands for “American depository receipt,” which means the shares are on deposit with the bank. You get two shares for each ADR – that’s why it’s double the price. And the reason it’s trading is because market makers are creating the receipts for the shares rather than the shares themselves. But Taiwan is place to buy it if you can.

Ben: And limit orders – are both of those ways to approach it? Should we be using limit orders for those?

Alexander: Yeah, I recommend – especially in this day of high-frequency trading and a bit of market manipulation on the part of the people with the most advanced technology – that you use a limit order on virtually everything you buy. And there’s no exception here – you should put a limit order in. And if you don’t get the stock, try it again the next day. But don’t just put a market order in because you have no idea what your fill is going to be.

Ben: That’s a good general rule to follow. Michael K. wrote in about how we’re past the August deadline that you were expecting Foxconn to be taking off. He’s looking at 10% losses right now. Any comments toward that?

Alexander: Well, the August announcement I was expecting actually came a bit early. On July 26, it pledged to invest $10 billion to build a display panel plant in Wisconsin that will employ up to 13,000 workers, and it’s a big project. It’ll involve a virtual village with housing and stores, and it will be spread over at least 1,000 acres. And this is a very big deal, and there’ll be more announcements like this in the weeks ahead.

Foxconn intends to make the U.S. one of its primary manufacturing hubs. And as I mentioned, it’s the largest contract manufacturer in the world, so there’ll be lots of exciting announcements coming in the weeks ahead – keep looking forward. And yeah, I think you’ll be very pleased with the news you get from Foxconn and its operations here in the U.S.

Ben: Well, thanks for answering all these questions. We are going to be doing these updates occasionally. Is there anything else our readers should be looking for as well?

Alexander: Well, let me mention a couple of things. When I say that this is a backdoor play on smartphone acceptance and the new iPhones, let’s just compare briefly Foxconn with Apple, okay? Foxconn sells for 10 times earnings. Apple is twice as expensive; it sells for 20 times earnings. Foxconn has a market cap of just $42.2 billion; Apple has a market cap 24 times bigger. As many people have heard, Apple is the first trillion-dollar company. Foxconn yields 2.4%; Apple yields half as much.

So if the iPhones are a success – and I have every reason to believe they will be – there’s a lot more room for Foxconn to move than for Apple. I mean, Warren Buffett’s piling into Apple, and God bless him, I hope he makes a lot of money on it. But I think the appreciation in Foxconn going forward will be much greater than Apple. The two of these companies’ portions are tied together.

But in a sense, Foxconn’s portions are better because Apple is just one of its customers. Foxconn is dealing with literally dozens of other big technology companies around the world and building their products too, so I think there’s a lot more growth here.

I’ll tell you one thing I would like to do, Ben, and that’s talk a little bit about some of the other portfolios that we have in TheOxford Communiqué that I write. I know a lot of people who’ve just come in on Foxconn are looking at the investment letter and are wondering what the heck these other portfolios are about. So if we have a minute, I’d like to take just a couple of minutes to talk about each portfolio. Would that be okay?

Ben: Absolutely, that’s a great idea.

Alexander: Let me just cover them all briefly. There are four of them. The first is called the Gone Fishin’ Portfolio – that’s our most conservative portfolio. It’s based on the idea, which underpins all of our investments and trading services, that, to a great extent, the future is unknowable as far as how strong the economy is going to be and what the market’s going to do.

And so rather than playing this guessing game of how long the expansion is going to last or how long the bull market is going to last, we start with a basic asset allocation of 10 different asset classes. These are represented by 10 different Vanguard mutual funds, which are the lowest cost mutual funds in the industry, or you can use exchange-traded funds (ETFs) instead. And all you do is hold those 10 asset classes and the percentages that are prescribed on the portfolio page of The Communiqué, and then once a year, you take 20 minutes to rebalance the portfolio. And that brings all your asset allocation back into alignment, and that’s all you do. The rest of the time, you’re free to go fishin’, play golf, travel the world or whatever you want to do. So that’s our core portfolio and the base of everything that we do.

The second portfolio I’ll mention is our Oxford All-Star Portfolio. This is a group of select investments that are managed by the world’s top money managers. And when I say top, I mean these are people who haven’t just had a good streak or a particularly strong run, but who’ve made great money in good and bad markets going back for many decades. It includes Warren Buffett, who’s running Berkshire Hathaway; Sam Zell, who’s running Equity Residential; and Tom Gayner, who’s running Markel Corp., which is like a baby Berkshire. And we don’t use any sale discipline on this particular portfolio because we let the managers make the sell decisions of the securities they hold within each of these vehicles themselves. So that’s our All-Star Portfolio.

We have a portfolio that is called the Ten-Baggers of Tomorrow Portfolio. Ten-baggers is a term that the world’s best-performing mutual fund manager, Peter Lynch, who ran the Fidelity Magellan Fund for years, coined to describe a stock that goes up tenfold or more. So we’re looking for smaller, more speculative companies. And whereas most of the rest of our portfolios are focused like a laser on the bottom line – what profits and earnings are doing – here, we’re buying younger companies. And some of them –actually, virtually all of them – are not currently profitable, so we’re looking at sales growth.

Just as Amazon had the tremendous run before it ever made a dime, a lot of companies have these terrific sales growth but aren’t yet profitable because they’re using their cash flow to pay for their growth. So we’re buying young, very technologically innovative companies in medicine, communications or biotechnology that have huge upside potential. And our sell discipline here is, if a company misses Wall Street’s consensus sales estimate by 15% or more, then we kick them out of the portfolio. So that’s how we run that portfolio.

And then lastly, we have The Oxford Trading Portfolio, which is just a selection of some of the most promising stocks in the market. There are companies that have excellent business prospects, high sales and high earnings. We feel that they’re unappreciated by the market in general. And here, our sell discipline is to use a 25% trailing stop behind every stock that we buy. So as long as the stock keeps trending up, we’re happy to hang in there and be shareholders. And if the company comes down by 25% or more, we’re out of it. So if you look in the portfolio, you’ll see the recommended price and you’ll see the recommended stop on every stock that we have. And that’s our Oxford Trading Portfolio.

So I encourage new members who’ve come in based on the Foxconn recommendation to hang in there with Foxconn and ignore the day-to-day and week-to-week fluctuations. But also think about diversifying into some other investments that also have a great deal of upside potential, and especially if they’re meant more to be shorter-term trading vehicles versus a long-term hold like Foxconn.

Ben: Now, with these other portfolios, is it like a “pick and choose” style of investing, or is there a plan associated with those as well?

Alexander: Well, with any portfolio, we’re diversified into different industries and different sectors. So I would say spread your beds out. Don’t just cherry-pick the recommendations, but instead give yourself a diversified portfolio and pick up several of the recommendations, rather than just one or two.

Ben: Thank you so much for answering these questions. I’m sure our new Members really appreciate the breakdown of all the portfolios, and we all look forward to some good news coming out of Foxconn.

Alexander: So I’ll keep everybody posted on the new developments with Foxconn as they occur week to week and month to month in the portfolio update, in the special Foxconn update that we publish from time to time and in the monthly issues of TheOxford Communiqué.

Ben: Well, thanks again, and have a great weekend, Alex.

Alexander: Okay! Thanks for having me.