Stock Picks – What is the True Value of Our Assets in a Time of Crisis?

Name: Samantha C. Cardenas
From: Tampa , Florida
Grade: Senior
School: University of Tampa
Votes: 981

Samantha C. Cardenas

University of Tampa

ValueWalk

May 1, 2020

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What is the True Value of Our Assets in a Time of Crisis?

It may seem hard to believe, but 2020 has revealed just how vulnerable lives, projects, and, financial securities are during times of crisis, and uncertainty. From Sony Pictures, postponing the release of “Spider-Man” Far From Home”, to the mining sectors in Zambia, Africa, announcing shutdowns for more than 3 months (Mopani), all populations have been hit in the place which hurts most the hardest, their economies. Entire families depend on wages, and the lack of these often signify sacrificing basic human needs for many.

In the US, more than $3 trillion have been spent on a stimulus package in response to the most recent Covid-19. Unfortunately, there is only so much the government can do before interest rates, inflation (in the long-term), and the budget deficit increase to abominable terms. This certainly makes one question: what are our presential assets truly worth during and unexpected crisis? What can one do to generate income? In times in which face-to-face contact is no longer feasible to save our lives, one can only truly rely on one form of financial assets, stocks.

But what stocks? What lessons have we learned about where one should invest in? The answer relies on pinning one’s faith on healthcare, and AI. As computer scientist Kai-Fu Lee, who has analyzed that 50% of jobs will be threatened by AI in the next 15 years, reveals: out of the 40 investments I have funded for technological models, 8, will completely abolish the presence of human workers” (Thompson).

The idea that algorithms have the ability to identify problem solutions and marshal a vast amount of data in order to attain information beyond anything any human can handle may seem fictitious, but it is now a reality. This is due to the fact that AI is almost a perfect system. It is reliable, reduces labor costs, and most importantly improves productivity, a combo previously unseen.

Kemet Corporation (KEM): An Undervalued Stock

Although all investments involve risk, and AI is prone to become a new challenge for emerging markets and advanced economies, it is important to identify three main qualifications as business majors: opportunities, rates of return, and economic performance. All which, are enhanced by investing in undervalued stocks, especially Kemet Corporation (NYSE:KEM) which currently trades at the value of $27.04.

The Kemet Corporation (1919) is an organization which focuses on the manufacturing of electronical key components which ensure that products such as computers, electronics, and automotive industries operate correctly.

Kemet Corporation's differentiation point relies on its implementation of advanced technologies, most specifically 5G networks, which are infallible for technologies such as AI to continue growing. Furthermore, it is the provider of companies that will enhance AI to new levels, as the company, “operates more than 23 manufacturing facilities and 33 sales offices worldwide, predominantly in Asia and North America… In the last fiscal year ending in March 2019, the company shipped an estimated 54 billion components to 188 countries and approximately 180,000 customers.” (Chapman).

Currently, entrepreneurs, such as Cao Xudong, Yin Qi, Tang Wenbin, and Yang Mu have created revolutionizing companies such as Momenta and Megvii. Momenta leads the automotive industry by creating self-driving cars (contributing to Kemet’s expansion), while the latter, is a facial recognition system that can identify a person from any screen or street camera, even when one is not directly staring at it. Ultimately, both are opportunities for the corporation to expand its grounds.

Moreover, not only has Chris Hall, Vice president of GIT at Kemet, introduced digital transformation into the company, but has also ensured that IT improves efficiency, productivity and quality to take the lead in the industry. In addition, the corporation is also researching ways to utilize data and operationalize enterprise-wide AI and ML projects, while unifying network operations and assuring a security platform that simplifies the deployment, management and service assurance through a single pane of glass.

A Potentail Acquisition By Yageo

There is also a pending negotiation agreement which establishes that Kemet may be acquired for the value of $1.8 billion by Yageo[1], which would position the enterprise as a one-stop provider of passive electronic components, including a leading portfolio of polymer, tantalum, ceramic, film and electrolytic capacitors, chip resistors, circuit protection as well as magnetics, sensors and actuators, all addressing a full range of end market segments. (Kemet) This would essentially create an industry leader with combined annual revenues of $3 billion, and raise the value of the company.

Through these un-acknowledged enhancements, Kemet has been proven to be an undervalued stock. Over the past year (four quarters), it has beaten earnings estimates (View appendix I), reason for which analysts are taking an especial interest in the corporation. In the first quarter of 2019, its estimated EPS was of 0.89, while the actual EPS ended in 1.05. In the second quarter it was 0.74, while the actual culminated with a 0.82 mark, and throughout this year, amid the spread of the coronavirus, it has still maintained above average growth, which was estimated to be .17, but maintains itself at .22.

Moreover, the company trades at an immense discount to the overall market, marked by its P/E ratio of 11.82, well below the S&P 500’s P/E ratio of 20.30. Inclusively, in 2019, it traded at an average of 45% discount to its earnings growth, and 10% discount to its sales. This could be observed by its PEG of .5, and P/S of .9 (Rego) Kemet also had impressive profitability ratios prior to the ongoing negotiations with Yageo, as it had a return on equity of 35.8%, return on investment of 25.7%, and return on assets of 16.4%.

Nonetheless, it is still important to acknowledge the effects that the spread of the current pandemic is having on the corporation. As of now, the growth estimates dictated by Yahoo Finance are predicted to be on the -47.20% mark for the year 2020. As for the current quarter its revenues are also estimated to decrease by 25.7 but will decline to only 7.70% on the year 2021. Yet, as mentioned previously, despite these drawbacks (which are affecting all corporations), its EPS trend is still set to be one the positive side of 2.18 for the year, grow by 12% throughout the next 5 years, and most importantly, is still considered an undervalued stock due to its 42% estimated return, 10.27% ROA, and 22.04% ROE (Yahoo Finance ).

Kemet's Profit Margin

Regarding its profitability and balance sheet, Kemet has a profit margin of 10.21%, an operating margin of 16.41%, and a debt/equity ratio of 2.38. The latter is a figure which must be addressed due to its essential significance. Although this number may seem high, it is critical to mention that Kemet is a manufacturing type of industry, which essentially means that it requires more debt financing that other service industries, and it makes sense for it to have a value that surpasses the 1.5 mark.

Moreover, due to its current growth investments, stakeholder should not consider the figure as a setback, but rather as an opportunity for growth. On account of the information presented above, hedge funds are now seeking to bet on The Kemet Corporation, as it is an enterprise which has the potential to beat the market over the long term and generate strong returns in the intermediate portion of the coronavirus outbreak.

Ultimately, despite the opportunities for growth mentioned above, the current situation the world is going through truly is no jest. As mentioned previously, it is hard to believe that a pandemic could change entire populations’ lives, and leave many off in a place of uncertainty, unemployment, and as students, with a lack of opportunities that would otherwise enhance our professional lives. This is especially true in developing countries, such as Peru, in which the minimum wage is an equivalent of 230 dollars, and 80% of markets operate in informality.

Due to this, one must take their time to reflect on what growth, and collective collaboration truly means. The only way in which the curve can be flattened, and the economy can recover, is through taking the necessary advised preventive measures and posteriorly, investing in markets which are undervalued but have a potential for stronger returns. In spite of what is occurring, as business majors, students should seek to observe this pandemic as an opportunity for growth, by either investing in their education through different online courses, or throughout stocks which can generate positive returns, innovate, and inclusively, may represent their first gains in their portfolios.

It is only a matter of time until Covid-19 passes, as a generation, there are two directions one can head towards: allowing this to affect our personal and educational achievements, or head out with greater skills, knowledge, and abilities once it is over.

Works Cited

Chapman, Sophie. Kemet Electronics: looking toward a digital future. 2020. 30 April 2020.

Kemet. Yageo to Acquire KEMET for US$27.20 Per Share in Cash. 11 November 2019. 30 April 2020.

Rego, Matt. 3 Undervalued Stocks for 2020. 4 November 2019. 30 April 2020.

Thompson, Nicholas. In the Age of AI 5 November 2019.

Yahoo Finance . Kemet Corporation. 1 May 2020. 1 May 2020.

Appendix:

  1. EPS for the 2019 quarter and Financial Earning

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[1] a leading global electronic component company with capabilities on a global scale, including production and sales facilities in Asia, Europe and the Americas. The company provides one-stop-shopping, offering its complete product portfolio of resistors, capacitors, wireless and circuit protection components to meet the diverse requirements of customers.