Lenovo Has Upside Potential

 | Jun 26, 2014 | 12:00 PM EDT
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Until 2005, few Americans had heard of the Chinese computer company, Lenovo (LNVGY). That year the company made a big splash stateside by buying IBM's (IBM) personal computer business.

Since then, Lenovo has become a major international player on the hardware side of the computer industry. Gartner and other observers now peg Lenovo as the largest personal computer maker, ahead of former top dogs Hewlett-Packard (HPQ) and Dell (DELL).

Not resting on its success, in recent months the company has been making more acquisitions. In January, it announced its acquisition of IBM's low-end server business. The next week it followed up this acquisition with another, Google's (GOOGL) Motorola Mobility, a maker of smart phones. Lenovo was already in the smartphone business but almost exclusively in China. With the acquisition, Lenovo moves into third place among smartphone makers, albeit a rather distant third: Samsung's (SSNLF) market share is 29%, Apple's (AAPL) is 17% and Lenovo's with Motorola is 6.4%, according to Counterpoint Technology Market Research.

These acquisitions help broaden Lenovo's product line and, in the case of smartphones, bring it a name brand with some recognition in the U.S. and Western Europe, though the Motorola brand has been greatly diminished from its glory days of selling its Razr phones.

For risk-oriented investors, Lenovo presents an interesting investment opportunity. PC sales are declining, and the smartphone market is dominated by two companies with considerably larger market share. Yet, Lenovo has proven that it is able to compete at the international level, and in the case of smartphones, the company has an opportunity to gain a foothold in much of the world where its products have not yet been sold. A risky investment, no doubt, Lenovo also has considerable upside potential.

In addition, it is viewed as a winner by two of my investment guru strategies (computerized models based on the tactics and thinking of some of Wall Street's most savvy investors). Getting high marks from one strategy is enough for me to suggest buying a stock; but when two strategies back a stock, as is the case with Lenovo, I have to think that this is a company that has a lot going for it.

One strategy willing to bet on Lenovo is based on the writings of James P. O'Shaughnessy, which favors the company's large market cap of $13.7 billion, earnings per share that have increased in each of the past five years, price-to-sales ratio of 0.38 (1.5 is the maximum allowed) and relative strength of 78 (this is a measure of how well the stock has performed in the past year relative to the overall market).

The other strategy that favors Lenovo is based on the writings of Peter Lynch. This strategy's principal variable is the P/E/G ratio, which is price-to-earnings relative to growth and is a measure of how much the investor is paying for growth. Up to 1.0 is allowable and 0.50 or lower is viewed as especially desirable. Lenovo is in this latter, highly desirable category with a P/E/G of 0.45. In addition, its debt is at a quite reasonable level, indicating that the company has not become mired in debt despite its series of acquisitions.

Lenovo faces some tough markets and tough competitors, but it has shown its ability to survive and thrive. This is a good investment for those willing to accept a fair degree of risk.

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