The weak economy has not stopped corporations from investing in machinery, software or anything else that helps improve efficiencies. Electronic instruments used with automation -- whether in manufacturing, refineries, mining or other industries -- are used to lower costs, improve efficiencies and enhance consistency and reliability. Everything from tablet computers to automobiles use electronics, and while the companies that make the final products get name-brand recognition from consumers, the companies that make the components used in those products are often little known or unappreciated.
Swiss-based ABB (ABB) is one example. A maker of power and automation products, it's hardly a household name. Yet its work is on display in the lobby of a New York City hotel where its robotics system picks up, stores and retrieves guests' luggage. ABB says it is the only automated system of its kind in the world.
While ABB does well for its customers, it also does well for itself. James P. O'Shaughnessy, a noted Wall Street thinker and mutual fund manager, created a strategy for choosing stocks that he called the Cornerstone Value Strategy. When I automated this strategy, it gave ABB a perfect score. What the strategy likes about ABB is its $42 billion market cap, hefty cash flow per share of $1.78, large number of shares outstanding (2.3 billion), and yearly sales that top $36 billion. If a company passes all these tests, it is placed in a bucket with all the others that passed. Then the top 50 rise to the top based on dividend yield. ABB's yield of 3.72% puts it in this top group. ABB is an O'Shaughnessy strategy star performer.
Another firm in the electronic-instrument area is Littelfuse (LFUS). They may seem fuddy-duddy, but fuses are an integral part of many electronic products, and the number-one maker of fuses is Littelfuse. In fact, the company's product line, which includes a variety of circuit-protection devices, is used in everything from coffee makers to iPads.
Littelfuse is favored by a strategy I created from the writings of successful mutual fund manager Peter Lynch. The strategy relies heavily on PEG ratio, which is price-to-earnings relative to growth and a measure of how much the investor is paying for growth given a stock's current price. A PEG of 1.0 is acceptable, and below 0.5 is great. Littelfuse is well into great territory with a PEG of only 0.31, which is based on the average of the company's three-, four- and five-year historical earnings-per-share-growth rates. Also in the company's favor is a debt load that is quite low relative to equity.
The world's second-largest connector company is also worth a look. Amphenol (APH) makes electrical, electronic and fiber optic connectors used in military, industrial, automotive, broadband, aerospace and other applications. Like Littelfuse, Amphenol gets a nod from the Lynch strategy. Its yield-adjusted PEG is 0.80 -- not nearly as low as Littelfuse's, but solid nonetheless. It also carries an acceptable amount of debt and is doing a good job of managing inventories.
These three companies in the electronic controls/automation space are all heavyweights in their respective markets. They're technological leaders that stand on solid financial footings. They are not sexy companies, but that's just one more reason to believe that they are worth investing in.