In Electronics, Size Does Matter

by David Jenyns on December 19, 2008

The electronics market has been a popular investment area for decades. However, you should be extremely cautious about buying electronics stocks even after their recent sharply downward revision in market prices, for their price-earnings ratios are still generally high relative to the whole market, which is especially true of smaller, more speculative issues.

In order to keep military spending within its budget, the Pentagon from time to time has to cut back marginal weapons systems. With the number of weapons systems shrinking, small electronics firms have to go after more dollars per sales.

There are many who believe that to be adequately integrated, an electronics company nowadays should have a size capable of handling about $50 million in annual sales. According to Richard E. Krafve, president of the big-league, diversified Raytheon Company, by 1970 the inevitable shakeout in the industry will result in perhaps seven or eight large integrated companies producing a wide range of electronic products from components to systems. The mortality rate for electronics concerns has been and will probably remain high. Market evaluation of the electronics issues could change overnight and sharply, and without much warning to stockholders. Watch closely, and see your portfolio grow.

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