The Sparks Will Fly

 | May 26, 2012 | 2:30 PM EDT  | Comments
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jbl

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aph

There's no getting around it: Energy is expensive. Companies are always looking for ways to save on their expenses in this regard, and that's why electronic-equipment companies are generally doing well -- as well as why we are seeing acquisitions in this sector.

Last week, Eaton (ETN), a power-management company, announced it would purchase electrical components maker Cooper Industries (CBE) for $11.8 billion. As The Wall Street Journal has pointed out, this is but one of a series of acquisitions in the sector. For instance, ABB (ABB) just completed its purchase of Thomas & Betts. In 2010, Emerson Electric (EMR) bought the U.K.-based Chloride Group.

So it comes as no surprise that my guru strategies like the electronic instruments and controls industry, which includes a variety of companies under the general electronic-instruments umbrella. The guru stock screens are strategies I've modeled after the writings of well-known investors. I've automated them so that I, and the subscribers to Validea.com, can input a stock symbol and learn immediately which of these strategies likes the company in question.

None of the companies I just mentioned currently earn high enough grades from any of my guru strategies for me to recommend them, but three other companies in the industry do rank highly. One of these three is Avnet (AVT), which sells semiconductors, embedded systems, electrical connectors and other electronic-component products.

My Peter Lynch-based strategy likes this company a lot. This screen emphasizes the P/E/G ratio, which is price-to-earnings relative to growth -- a measure of how much the investor is paying for growth. A P/E/G of 1.0 or less is acceptable, and anything south of 0.50 is exceptional. Avnet is in exceptional territory, with a yield-adjusted P/E/G of 0.42, based on the average of its three-, four- and five-year historical earning-per-share growth rates. The company is also doing a reasonably good job of managing its inventories, which the Lynch strategy favors as well.

Jabil Circuit (JBL) is another Lynch-strategy favorite. The company calls itself "one of the world's largest electronic manufacturing services companies." It operates on four continents, and it has a workforce of more than 100,000.

Jabil's P/E/G ratio is an extremely impressive 0.28, based on the average of its three-, four- and five-year historical EPS growth rates. As with Avnet, it too is managing inventories well.

Amphenol (APH), meanwhile, gets a nod from my strategy based on Warren Buffett's investment approach. This company designs, manufactures and markets electrical, electronic and fiber optic connectors, interconnect systems and coaxial and specialty cables. Morningstar refers to Amphenol as "the world's second-largest connector company."

My Buffet-based strategy likes Amphenol because it is a major player in its market, has generated 10 years of steadily increasing EPS, has a reasonable amount of debt and has enjoyed a return on equity averaging at 28.9% over the past 10 years. Plus, the Buffet strategy projects that investors buying today will earn a 15.2% average return on their investments over the next decade.

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