Tech Comapny Started by Blue Collar Gut With 7500

This article was originally published on July 16, 2018, but questions continue to pile in and more ads out this week indicate that it's still being pitched as a "one stock retirement plan" … so we're re-sharing it here. The ad appears mostly unchanged over the past four years, other than testing out new headlines, the date for the latest version is noted as October 2020, but I've added some updates about the company below.

Alexander Green at the Oxford Club has an ad out for his "single stock retirement plan" that's sending a ton of questions our way — and you can see why. He's promoting this one stock as being able to deliver a "multimillion-dollar retirement", and there are obviously huge numbers of us holding out hope that there's a way to "save" the retirement we know we're not financially prepared for.

Here's a little taste:

"I'm going to show you how a modest investment in a single $3 stock could generate a multimillion-dollar dream retirement in the coming years.

"I call it the 'Single-Stock Retirement Plan.'

"Some might find the idea of retiring on one stock outlandish, yet many thousands of Americans have already done it.

"In fact, as you're about to see, the 20 wealthiest men and women in America today made their fortunes thanks largely to a single stock."

And he says that if you're going to retire on one stock like those wealthy men and women did (though they mostly built businesses, they didn't invest passively in one stock), Green says it has to be "the perfect stock."

He's even got a checklist for what "perfect" looks like when you're seeking this "dream stock" for a one-stock retirement… which is when the clues start to drop in about what stock he's pitching:

"Leader in cutting-edge technology….

"products used by billions of customers…

"profit margins protected [patents, trademarks, etc.]…

"hundreds of billions of dollars in future sales and profits… contractually guaranteed…

"pay an enormous dividend."

And he says this "perfect" stock should have catalysts — upcoming announcements that could drive the share price — and that the "one key element" is that the stock must be "undiscovered." And that it should "trade for a just a few dollars a share."

The per share business is silly, of course, but investors do get hung up on the idea of paying a low per-share price as a prerequisite for huge future gains. Different countries and different eras have different expectations for "per share" pricing — some large Australian companies trade at what we would think of in the US as "penny stock" prices, for example, and it used to be that most large US companies would aggressively manage their share price, using stock splits, to keep it in the $40-100 range. The market cap and the valuation of the company are what matters most, the price per share is mostly irrelevant.

But anwyay, that's all a lead-up to this stock that Alexander Green is teasing… what other clues do we get? From the ad:

"I only recently uncovered it.

"And if you move quickly – before an upcoming announcement set for August 20 – this $3 stock could hand you the kind of carefree retirement most people only dream about."

And then some specifics…

"The company has inked deals with Cisco, Microsoft, Intel, Sharp, IBM, Hewlett Packard, Nintendo, Sony, Nokia and Apple…

"In total, I expect it to receive more than $34.5 BILLION from these partnerships alone….

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"According to data from Intellectual Property Watchdog, the firm has quietly amassed one of the largest tech patent libraries of any company in the world.

"It has 29,187 patents inside the United States and 49,599 registered globally.

"You can see why the world's most famed tech companies are all signing blockbuster deals with this little-known firm trading for $3."

And it sounds like this is not a small company, despite that $3 share price…

"… earnings per share recently surged 106%.

"And I expect the company to hit $164 billion in annual sales as early as 2019.

"The company pays a big dividend too… 116% bigger than the S&P 500 average."

That has changed a bit between the initial tease in 2018 and this latest update in late 2020, the pitch is now that the company will have $179 billion in revenue in 2021… and it actually ended up way above that level, at $215 billion. Revenue growth has averaged about 7% in the years they've been touting this stock. And the dividend is still above average, though not as dramatically so as it was cut in 2019 and hasn't grown much since.

Why is this stock "unknown?" Green says it "does not trade in a normal way" and it's not on a US exchange… and, far more mysteriously, that it "literally trades under a secret name."

So that's enough to get our answer, I bet, but let's throw a couple other clues into the Thinkolator…

""A major multibillion-dollar deal that involves both Apple and Donald Trump is about to bring this secret company into the mainstream…."

That was the spiel back in 2018. By 2020, it had morphed a bit to add some specifics about this company's US presence:

"The BIG Deal: 50,000 American Jobs, Apple and This $3 Stock

"With all of these multibillion-dollar contracts in place, the next step for this company is opening up production facilities all across America to fulfill the contracts.

"And it's declared its intentions to do so in the future.

"A company executive stated that $10 billion facilities could be built in Texas, Ohio, Pennsylvania, Illinois, Wisconsin, Indiana and Michigan.

"We're looking at tens of thousands of new American jobs.

"In one state alone, the governor estimates that 13,000 new direct jobs… 22,000 indirect jobs… and 10,000 construction jobs will be created.

"Apple is likely to be the biggest partner in these new projects – reports indicate that the first $10 billion deal could be to create display screens for iPhones, iPads and MacBooks.

"The first project involves 28 separate construction companies with more than 1,000 truckloads of material moving in and out every day.

"And as this gigantic facility gears up for the first production run (and the thousands of jobs that come with it), it will make headlines all over the country.

"I'm expecting a major announcement to come out in the weeks ahead regarding the status of the project and the company's expectations for opening the doors."

OK, so that's the catalyst, that Alexander Green thinks this large but not very well-known company will be in the headlines as it opens major manufacturing plants around the US, bringing Apple's assembly projects back to its home market.

Any other clues?

"… the $3 stock I'm talking about had very humble beginnings.

"It was started by the blue-collar son of a career police officer….

"… he scrounged together $7,500 in seed money and went to work.

"He founded a tech company, but a very different kind…

"He realized that he probably couldn't compete directly with the Apple, Amazon, Samsung and Google of the world.

"But if he could quietly do business with these tech giants, he just might turn his own venture into a successful company."

He started out building computer hardware — the chassis for a desktop computer, and then aggressively expanded to build and provide components for all kinds of tech products. Green cites a few recent contract examples"

"The company has signed an agreement to build eight different motherboards for Intel.

"It's also building five more for the $5 billion semiconductor company Advanced Micro Devices.

"It's building LCD screens for Sharp in an $8.8 billion production plan."

And a dozen others, components for Amazon and Nokia and Acer and Nintendo and Apple. All those clues are essentially the same as they were four years ago. So who is it?

This is, as several readers have already figured out, the Taiwanese company Foxconn, known for playing a major role in assembling Apple's iPhones but also a big supplier to most of the world's gadget makers. Foxconn is the world's largest contract manufacturer and one of the largest private employers in China (if not the largest), and is one of the largest tech companies in the world (at least on a revenue basis).

And the "secret name?" Foxconn is the more widely-known name of the company, adopted when they were trying to get more international sales around 1980, and its the name you'll see most articles use (as when they discuss the massive "Foxconn City" in Shenzhen, which has more than 200,000 workers), but the actual name under which it was founded (in 1974) is Hon Hai Precision Industry, and it's still listed under that name in Taiwan. You can see the company's own description of itself on their website here.

So yes, I suppose it's kinda "secret" that Foxconn, the contract manufacturer that most tech investors have heard of, is actually Hon Hai — though certainly all of the institutional investors who own the lion's share of this large cap stock are obviously aware.

And yes, it's technically a $3ish stock, though that requires some currency translation — it trades in Taiwan at ticker 2317, and closed yesterday at T$109.50 in New Taiwan Dollars (it was T$82.80 when we first covered the stock four years ago), which in US$ would be $3.68 ($2.70 in 2018, the exchange rate was also bit different then).

And yes, it's not particularly difficult to trade the stock in the US — there is an ADR representing the Taiwanese shares for US investors, it trades OTC at HNHPF (sometimes has been HNHPD, when it's trading ex dividend), with each US OTC share equaling two shares in Taiwan. There are similar depository receipts trading in London at HHPD, also representing two Taiwanese shares each. The overwhelming majority of trading volume is usually in Taiwan, as you might imagine, so that's where the "fair" price is set, but the London and NY trading tends to be very close to that price most of the time, despite the lower volume.

So if you want to buy in the US, technically you're paying $7.30 or so per ADR today (or $5.70 back in 2018)… but each ADR represents two shares, so I suppose you can say it's "secretly" a $3 stock.

All that mystery and intrigue is beside the point, though — the question is, do you want to own a piece of this gigantic electronics company? Here's what I can tell you about it:

It's a big company, the market cap is just about US$50 billion… so it's not likely to rise 1,000% over the next decade, and it's not a small cap rising star, even though the share price looks fairly low to those of us who are accustomed to US tech companies who let their per-share prices rise into the thousands sometimes. Hon Hai is the second largest stock in Taiwan, trailing only the massive Taiwan Semiconductor (TSM).

Hon Hai/Foxconn is priced at a steep discount to the broader market, and has underperformed the broader market, for a long time. The shares trade at about 10X trailing earnings and 1X book value, with a price/sales of only 0.25, and the dividend is very high — likely to be near 4%, though the payout varies pretty widely (they pay out only once per year, in August).

That hasn't helped the stock much, I'm afraid, it has almost always traded at pretty close to that valuation, and has not been able to generate any meaningful share price growth for a long time. Even if you bought at close to the bottom of the market (for Hon Hai, at least) in November of 2008, you would have gains of only 110% over that near-decade, including dividends… far short of the 450% return of the S&P 500 over that time. And about 4,300% for Apple, Foxconn's most important customer. Here's what that looks like, for the visual learners among you:

In case you're curious, here's that same chart for the four years or so since the Oxford Club folks started pitching this as a "single stock retirement plan" — thanks to teh recent downturn in the S&P, Hon Hai is only trailing the broader market's returns by about 30% the moment (Apple, of course, is still clobbering both):

Which does serve, at least, as a helpful start to a thought exercise about who profits from hit products — is it the designers, the developers, or the companies who sell them parts and assemble the actual gadgets? Lots of things go into that, and there are plenty of growing and profitable component makers, and Foxconn has certainly made a profit most of the time over the years, but the two things that seem to me have the most impact on compounding long-term growth in the sector are sustainable brands and some measure of uniqueness. Suppliers can do very well when their product or chip or whatever is better than the competition, but they also have to keep that edge… or make the component an in-demand brand or a near monopoly, as Intel did 30 years ago with their "Intel Inside" branding campaigns for chips and their tight partnership with Microsoft.

That's what I'd look for when researching Foxconn… where do they have the opportunity to become more than an anonymous assembler? What's keeping them from having to compete on price? Perhaps this relatively low valuation is a buying opportunity — but Foxconn shareholders have failed to really benefit from sales growth or new businesses or booming iPhone sales for a long time, trade war or no trade war, COVID or no COVID, so I imagine there are some structural problems behind their relatively weak performance.

The stock does also carry some political and regulatory risk, or at least "headline risk" because of the frequent complaints and lawsuits about worker treatment at its many gigantic factories around the world. We all remember the stories about suicides by Apple iPhone workers, and those were mostly Foxconn stories about the pressure, secrecy, long working hours and employee stress in Shenzhen, but similar smaller-scale stories seem to pop up with some frequency. Hopefully the US factory that Foxconn is building in Wisconsin, following some mega incentives from the government, will be a bit kinder and gentler, we'll see.

Foxconn gets lumped in as the "iPhone maker" by most investors, so the share price tends to react to the iPhone cycle as massive predictions of huge sales volume send the stock climbing and slower sales, like we've seen recently, help to pressure the stock… the company is obviously far more than "just" Apple's main manufacturing partner, though I don't know if that will help to smooth things or create a real growth trend for the stock.

They've been aggressively expanding into new businesses and buying up brands and technologies for a long time… and yet, adding more second-tier brands and low-margin businesses in very competitive sectors doesn't necessarily give them better profitability. My impression is that the pressure of the low-margin contract manufacturing business, where companies like Apple push them to get costs lower and lower each year, seems to have kept them from showing any real sustainable earnings growth on the back of the growth in the business… so if Alexander Green ends up being right about this being a "one stock retirement" idea, it will likely be because Foxconn starts to get a little more leverage over the actual brands whose products they make, giving them a chance to increase margins… or because they finally move up the "value added" chain a bit, as they've been trying to do with their push into the automotive business.

And that massive US investment? It hasn't really panned out. The centerpiece of that plan was a big display factory in Wisconsin that Foxconn agreed to build, in high-profile handshake ceremonies with then-President Trump, with promises of 13,000 new jobs and a renaissance in US high-tech manufacturing, and that plan seemed pretty snakebitten from the beginning. There is still a Wisconsin project for Foxconn underway, but it's much smaller now, with hopes for maybe 1,500 jobs (there's an interesting story here about how it all went wrong, if you're curious). Maybe the latest push to "onshore" more technology manufacturing will mean yet more incentives to lure Foxconn to build facilities elsewhere in the US, we'll see, but so far it's not a meaningful factor for Foxconn's earnings.

More recently, Foxconn has signaled that they plan to enter the electric vehicle business, competing with longtime auto industry outsourcers like Magna International (MGA). The highest-profile part of that was purchasing the former GM plant in Lordstown, Ohio that Lordstown Motors had previously bought for its electric pickup truck project — it's essentially an outsourcing deal, Foxconn is buying the factory and will be contract-manufacturing the pickup truck for Lordstown Motors, and hoping to also manufacture electric vehicles for other companies who don't have the manufacturing expertise. It sounded like a desperate ploy from an EV maker who had gotten in over its head, and Foxconn, unlike Lordstown, does have the resources to invest in building up the plant. Who knows, maybe they'll be able to translate their skills to this new industry and get a new avenue for growth. There is some potential for slightly better margins in the auto assembly business, Magna has a 4-5% profit margin, versus 2-3% for Foxconn, but I wouldn't count on Foxconn being great at this new business out of the gate. As they announced when they unveiled some prototype designs last Fall (assembled by someone else), "Our biggest challenge is we don't know how to make cars." I'm sure they can learn, but I'd hesitate to bet a lot on them being really good at it anytime soon.

I have a hard time predicting huge success for Foxconn in general, particularly because they've been in this rut of relatively slow growth and declining margins for a long time, but it's certainly possible. You may well take my skepticism with, well, a bit of skepticism… maybe the "one stock retirement" hype from the Oxford Club and my skepticism can balance out a bit, and then you can go into your analysis fresh and unbiased and make your own call. It's definitely a cheap stock, so you've at least got that going for you. But there's no rush, it's been a cheap stock almost all the time for a decade or more, you've got time to think it over.

So please do go forth, researchify for yourself, and let us know what you think about Hon Hai and its prospects for the next few decades. Just use the friendly little comment box below… and thanks for reading! I've left all the old comments attached below from our past updates to this story since 2018, to provide some perspective.

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