Invest in ZAGG - Up and coming company

Company Overview
ZAGG was founded in 2005 and began its operations with one core product: the Invisible Shield. The invisible shield is essentially a screen protector for electronic devices. However, what sets the product apart from everything else in the market is its quality. The company’s founder created the product out of material that is essentially used for military purposes to protect the blades of helicopters. He took this high quality material and created a consumer product. The material completely protects your device from scratches. To look at a video of the product in action, visit www.zagg.com and take a look at any of their videos. We feel that the company is poised for explosive growth as the use of smartphones and devices such as the iPad has become so prevalent. Instead of betting on an individual device maker, why not bet on the growth of the entire industry? The company’s bestselling products are the shield for the iPhone and more recently, the shields for the iPad. Over the years, the company has expanded into other areas such as audio devices, leather cases, and other electronic accessories. The company has no debt and a growth rate of over 100%. With the growth of smartphones (they make shields for essentially every new cell phone on the market), the company should see a boost in sales. Any short-term catalysts such as the Iphone’s introduction to Verizon will have a direct impact on ZAGG. ZAGG sells its products in Best Buy, mall kiosks, and more recently, in Verizon and AT &T stores.

In the last 12, months, ZAGG, reported an EPS of .33. Since the company is extremely young, its cash flows are uncertain. Their most recent quarter’s earnings significantly beat analyst estimates and represented an earnings growth of 300% over the same quarter last year. Although I believe it is extremely difficult to come up with a growth rate for ZAGG, I believe the uncertainty is only to the positive side and it is possible to perform a DCF valuation being conservative. Since ZAGG’s products are mainly related to the mobile device industry, a growth rate of the smartphone market would be a reasonable measure. The smartphone market has grown an average of 30% over the past 4 years and the trend is expected to continue. In fact, just over the past year, the market grew 55.4%. It is safe to assume that ZAGG’s earnings will grow at the same rate as the smartphone market at a conservative rate of 25%. Taking account for ZAGG’s business maturing over the next 5 years, a growth rate of 20% is more likely.
Based on a DCF valuation, ZAGG has an intrinsic value of $14.65, which is significantly higher than its current price around $8 a share. Keep in mind that the earnings growth could be much more explosive since the company is very new and is also expanding into markets such as accessories for laptops and devices such as the iPad.
EPS for past 12 months : $.33
PV of earnings based on a 20% growth rate and a discount rate of 8.55% based on a risk free rate of 3%, market premium of 5%, and a beta of 1.11:
Year Earnings PV
1 .40 .37
2 .48 .41
3 .57 .45
4 .68 .49
5 .82 .54
Terminal value 12.40

Terminal value is based on a constant growth rate of 4% (based on average US growth). The discount rate was based purely on CAPM since the company does not have any debt.
Since the DCF valuation for a company such as ZAGG could prove not to be very reliable, I feel that the best measure to value a company such as ZAGG is with the PEG ratio. The Price to earnings to growth ratio takes earnings growth into account. ZAGG has a Forward PEG ratio of .7. This compares to a 1.6 ratio for the entire S&P 500, which is a 54% discount relative to the S&P. It has a Forward P/E ratio of 20.6, which is a 16% premium to the S&P 500 ‘s Forward P/E ratio of 17.7. Although ZAGG is trading at a premium, I think a premium of 16% is warranted for a high growth company.

Investment Recommendation : Silver Wheaton (Ticker Symbol SLW)

Silver Wheaton generates revenue from the sale of silver. It has 17 purchasing agreements through which it acquires silver production from the counterparties. Just to clarify, the company does not take part in any mining, it simply enters into purchasing agreements with mining companies for a fixed price. Their purchasing price is around $5.80/oz of silver and the market price is around $17/oz so that gives you an idea of what sort of margins they have. If the price of silver goes up, their margins will increase (obviously). But here is the key – the contractual price to purchase is subject to a MAXIMUM increase of only 1% per year so no matter how high the price of silver goes, their purchasing price will remain low. The company’s market cap is over $5 billion but they only employ 23 people because that’s all they need. They are based in Canada but somehow got the company registered in the Cayman Islands and therefore pay NO income taxes. The price of silver is expected to increase as demand is very high. China actually has a ban on silver exports due to high demand and low supply. The price of silver will likely increase in the coming months and SLW is poised to be a huge beneficiary. BUY BUY BUY.

Short Sell US Treasuries

The market is in recovery mode, there is no denying that. Recent economic data such as jobless claims and pending home sales all point to a recovery in the economy. Since March, the Dow Jones has jumped from 6,600 to its current value of 8,700. As equities regain their attraction, investors are bound to avoid fixed income investments and put money back into the stock market. Consider investing in an ETF that shorts U.S Treasuries. With Treasury yields so low, there is no reason for people to invest in treasury bills, notes, or bonds and now since the market is showing signs of recovery, people will take money out of the debt market and invest it back into equities. The ETF is TBT and it’s an Ultrashort ETF for added volatility as treasury yields usually do not fluctuate too much. The threat of inflation and the falling dollar will also lead to lower bond prices.

Market Response to Geithner'sToxic-Assets Plan

On Monday, March 23, the market closed up a remarkable 497 points in response to the government's unveiling of a new plan that would create a public-private partnership to buy up toxic-assets from troubled banks. Purchasing these assets would allow the banks to take these toxic-assets off their balance sheets and as a result, increase financial stability. The market responded positively to the plan, moving up throughout the day.

The plan allows private investors put as little as 10% of their money to purchase these assets, whereas the Treasury would contribute the remaining 90%. The market's broad-based rally is a reflection of the investor-friendliness of the plan. The risk for the private investor is minimal because he can walk away from the investment if the value of the assets falls further.

Furthermore, there was additional supporting data that make the rally legitimate and not just a bear rally. According to Reuters, existing home sales unexpectedly rose 5.1 percent in February, which is the largest increase since July of 2003. What makes the rally so strong is that it was broad-based. The Financials led the way but at the end of the day, all 30 of the stocks in the Dow and 98 out of 100 in the Nasdaq were up.

Since then, we have seen the market move higher consistently with supporting positive economic data. While I remain cautious about investing all at once, this could be the beginning of a turnaround.

Image source: http://img.timeinc.net/time/daily/2009/0902/tim_geithner_0210.jpg