The world of small-cap electronics stocks is a violent one. Being cyclical and prone to revolutions every few years, Moore’s Law isn’t the only thing every manufacturer has to be leery of. But the volatility that gives you the risk of these small stocks blowing up in your face also gives them the kind of fuel that occasionally builds 10-baggers.
Nam Tai Electronics, Inc. (NYSE:NTE) manufactures and designs for original equipment manufacturers (OEMs) for consumer goods. But what makes Nam Tai Electronics, Inc. (NYSE:NTE) special? For one thing, consistent financials. Nam Tai’s been rocking solid free cash flow over most of the past decade. Through the Great Recession, Nam Tai Electronics, Inc. (NYSE:NTE) held together reasonably well despite its small size and relative obscurity. I also like how the company is trading for only 1.7 times its book value and around 9 times its trailing earnings.
However, I have to caution you against getting too excited. Nam Tai Electronics, Inc. (NYSE:NTE) has traditionally paid reasonable dividends, often in the 10% range. Right now that dividend is 4.3%, which is only special in a company with a $600 million market cap that pulls 5.8% profit margins because it isn’t particularly stable. While I love getting paid to own a stock, Nam Tai’s traction to continue paying a dividend is shaky even on a good day. As the economy recovers I’m sure it will do fine, but you can do better.
Encore Wire Corporation (NASDAQ:WIRE) is all about wire. As construction cooled, the need for cable and wire fell off. It hasn’t exactly helped that commodity prices are jacked up. Because of this pressure from both sides, Encore has been squeezed to within inches of its life. For a company with less than a $700 million market cap that only pulls 1.8% profit margins, it’s a hard knock life indeed. I’m not even sure why Encore bothers paying a .2% dividend.
Unfortunately, I don’t have a lot of great things to say here. Encore Wire Corporation (NASDAQ:WIRE) is trading at a fairly average 1.6 times book value and a very steep 34 times earnings. So would you rather pay half that much for a company in a less stressed industry, or hope that you’ll get back your money in about 15 more years when the next probable housing boom occurs? Encore may be doing a fine job, but it’s essentially keeping a bonfire lit during a hurricane — a possible but miserable task. I’d stay away from Encore for a while.