Know Your Customer


When macroeconomic or company-specific news first hits, the market's response can be swift. All stocks within an industry, regardless of their individual differences, often get swept up in the tide.

Knowledge of critical factors that affect an individual company can help investors gauge whether the stock's initial reaction makes sense. Few factors are more critical than a company's source of revenue. 

Consider the following situations involving our recommended stocks.

• Shares of all semiconductor-equipment companies tend to react whenever bellwether Intel ($28; INTC) adjusts its budget for capital spending. Any shift in Intel's strategy may provide clues to the health of the industry, but it has less effect on Lam Research ($72; LRCX) than on most companies in the group. Intel accounted for less than 10% of Lam's revenue in fiscal 2015 ended June, while Micron Technology ($16; MU), Samsung Electronics, and Taiwan Semiconductor Manufacturing ($20; TSM) each generated more than 10% of Lam's sales.

• China, the once-robust growth engine for many U.S. companies, is sputtering. The government's devaluation of its currency will make exports cheaper but also make imports more expensive for Chinese buyers.

China's actions could produce a mixed effect on Apple ($115; AAPL). China has been the leading driver of Apple's growth (companywide sales rose 26% in the 12 months ended June, with China sales up 66%) and now represents 23% of the company's revenue. While Apple devices will likely become more expensive to Chinese customers, costs to produce and sell those devices, some of which are denominated in yuan, also seem likely to drop. Aside from the Mac, most of Apple's products are made in Asia, with key manufacturer Foxconn Technology based in China.

Recommended companies with 12% or more of revenue coming from China include: Apple, Lam, Lear ($107; LEA), Nvidia ($23; NVDA), and Skyworks Solutions ($87; SWKS).

• The strong U.S. dollar has crippled overseas growth at many multinational companies, prompting some investors to prize businesses highly reliant on the fairly steady U.S. recovery. These recommended stocks generate at least 70% of revenue within the U.S.: Alaska Air Group ($81; ALK), CDW ($39; CDW), Comcast ($60; CMCSa), Community Health Systems ($59; CYH), CVS Health ($107; CVS), Foot Locker ($74; FL), Gilead Sciences ($116; GILD), HCA Holdings ($90; HCA), Kroger ($37; KR), Shire ($242; SHPG), and Southwest Airlines ($40; LUV).

Here are some other key customers for recommended stocks:

• Skyworks drew on Foxconn and Samsung Electronics for a combined 44% of revenue in fiscal 2014 ended September. The company's fate also rests in the hands of Apple, which uses both of these manufacturers.

• Both Gilead and Shire rely heavily on major drug distributors such as AmerisourceBergen ($106; ABC), McKesson ($216; MCK), and Cardinal Health ($85; CAH). Gilead's exposure is greater, with 63% of its sales to those three firms, versus 48% for Shire. 

• Ford ($15; F) and General Motors ($32; GM) each account for more than 20% of Lear's revenue, followed by 11% from BMW. At Magna, GM, Fiat/Chrysler Group, Ford, BMW, Daimler, and Volkswagen ($38; VLKAY) each represent 11% to 18% of sales.

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