A Unique Strategy For Shorting Mobile Laggards

Betting on the winners in mobile is a sound strategy that has delivered strong returns for my portfolio.  With the rise of smartphones and tablets, there are many opportunities for savvy investors to gain exposure to this hot growth market.

Even though I have never bought Apple ($AAPL) stock, I have been a big investor in Apple’s iPad and iPhone franchise.  The traditional investor would buy $AAPL stock and hope for the best, but I prefer a more unique strategy.  I would rather approach it from a supply chain perspective, instead buying up large stakes in the small-cap semiconductor shops that manufacture tiny chips that go inside these cutting-edge devices.

Some of my most successful mobile picks have been:  Cirrus Logic ($CRUS) , Qualcomm ($QCOM), ARM Holdings ($ARMH), and Skyworks Solutions ($SWKS)

Qualcom is up 59.8% in the past year and Skyworks Solutions has delivered a whopping 87.3% return year over year.  All of these stocks have rallied on strong customer demand for smartphones and tablets, but exactly how much upside is left?

I have generated some good returns on the long side, but lately I have been starting to think about the opportunities on the short side.  Being able to pick the laggards in mobile can be equally lucrative as picking the winners.

For me, the two mobile laggards that jump out at me are Nokia ($NOK) and Research in Motion ($RIMM). Both of these companies have fallen on hard times and are becoming more irrelevant in the eyes of consumers each day.  The reality is that competition is cut-throat and Nokia/RIMM simply haven’t innnovated as fast as their rivals.

So what is the best approach to capitalize on these companies failures?  I prefer a two-pronged approach – short the stock and also short their supply chain.  Sounds confusing, right?  Actually, it’s pretty simple.

RF Micro Devices, Inc. ($RFMD) is one of Nokia’s top suppliers and Nokia represents roughly 50% of RFMD’s revenues.  For every $1 RFMD generates, roughly $0.50 is tied to their top customer Nokia.  The graph below shows just how closely correlated these two companies are.

Look at the close coorelation between Nokia and RFMD, even though Nokia's market cap is roughly 20x larger than RFMD's.

I think this is a unique approach for shorting the laggards in mobile because you can essentially amplify your returns by placing another bet on the supply chain.  Another potential idea here is to place a short on both Research in Motion ($RIMM)  and Marvell Technology Group ($MRVL) .

Research in Motion accounts for roughly 20-25% of Marvell’s overall revenue so MRVL’s success is very closely tied to RIMM.  Ouch.

Notice the close correlation between RIMM and MRVL.

If you are looking at short opportunities within the mobile sector, I think it makes sense to consider the supply chain as well.  By placing a bet on the mobile company and its associated supply chain, it gives you a leg up on other investors and could generate some hefty returns for your portfolio.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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