The invention of the smartphone changed the game as far as consumer electronics go. Apple (NASDAQ:) rode the iPhone to unbelievable profits and its current status as one of the world’s most valuable companies.
Investors are looking for the next big technological inflection point, and a lot of them have latched onto the internet of things as a good hunting ground. And that makes a ton of sense. Internet of things stocks are set to profit from another big societal transformation. All sorts of devices will become smart and infinitely more capable, just like what happened to phones a decade ago.
It’s not especially easy to tell which companies will be the biggest winners as the internet of things goes mainstream in coming years. But here’s your cheat sheet for the seven stocks to invest in so that you can ride the wave.
Internet of Things Stocks to Buy: Sensata Technologies (ST)
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Sensata Technologies (NYSE:) may not be a household name for most investors, but the company’s products are everywhere. It makes sensors which help devices work better. Companies are moving many programs to remote access platforms that they can manage with apps. This beats having to keep employees on site. However, without good monitoring and data, these systems would break down.
Sensata offers crucial parts to make these sorts of systems function. The company serves a huge variety of industries, including construction, energy, healthcare, agriculture, automobiles and aerospace. You can find its sensors in products ranging from Slurpee machines to anesthesia machines among many others. With the world collecting more and more data, Sensata should have plenty of growth ahead.
Turning to ST stock, it’s one of the more reasonably priced tech stocks in the market. ST stock sells for just 13x trailing and 11x forward earnings. That’s pretty great, considering that Sensata has delivered impressive results in recent years. Over the past five years, Sensata has grown earnings at a compounded growth rate of 27% per year. That’s sizzling. Analysts see a slowdown ahead, but still anticipate 11% annual growth over the next five years. That’s nothing to complain about with a starting 13x price-to-earnings ratio.
Sensata gets a large chunk of its revenues from the automotive market which is why ST stock has underperformed in recent quarters. Auto sales have slowed down after all. But the business is diversified, and as it is, auto sales could rebound sharply once China and the U.S. reach a trade deal.
Texas Instruments (TXN)
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Texas Instruments (NASDAQ:) offers a diversified way to play a bunch of new technologies. With its analog chip focus, however, TXN stock puts itself in the sweet spot for the internet of things as well.
Like Sensata, Texas Instruments helps turn real-world observations into digital data that devices can take advantage of. Also like Sensata, Texas Instruments has heavy exposure to the connected car trade theme, which is not the best place to be at this very moment. That said, things can turn quickly and sentiment is currently rather dour.
As it is, Texas Instruments just reported fantastic earnings, sending TXN stock to new all-time highs. However, trade war fears and the general market selloff have TXN stock falling back in recent days. This could be a good time to buy the dip.
Texas Instruments is now selling at just 23x trailing and 22x forward earnings. That’s not bad at all for a company with this sort of growth history. Over the past five years, Texas Instruments has grown earnings at fantastic 25% per year rate. TXN stock also offers a reasonable 2.5% dividend yield which the company increases every year. While internet of things isn’t the only iron that Texas Instruments has in the fire by any means, the company stands to benefit as people buy more connected devices.
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If you haven’t been paying attention closely, you may not have realized that Garmin (NASDAQ:) has totally reinvented itself. A few years ago, GRMN stock was in the doghouse as investors assumed that smartphone navigation apps would make Garmin’s standalone mapping devices obsolete. That was a reasonable thought to have.
But Garmin managed to pivot to a new business model. It’s now become a leading diversified consumer tech products company. It has hot products within fitness and smartwatches, to say nothing of its legacy navigation products for cars, planes, boats and so on. While these are diverse businesses, they are tied together by the internet of things theme. As internet connectivity becomes faster and more widespread outside the home, more and more consumers will pick up connected devices that Garmin is selling.
What’s to like about GRMN stock in particular right now? Shares have sold off roughly 15% over the past quarter in large part due to trade war worries and concerns about an economic slowdown hitting consumer spending. Those are valid concerns. But it’s pushed Garmin stock down to a forward P/E of just 20, while it offers a 2.8% dividend yield. Not too shabby.
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Of the semiconductor names, STMicroelectronics (NYSE:) is one of the most closely linked ones to the internet of things. STM — Europe’s largest semiconductor firm — has a variety of business lines with substantial exposure to the auto and industrial markets. Given the state of the auto industry in general, and weakness in the European economy in particular, STM stock hasn’t exactly been in the right place at the right time lately.
However, looking past that short-term weakness, there is a lot to like about STM stock. For one thing, there’s excitement in STM’s auto business because they have cutting-edge chips that are being used in electric vehicles. In fact, STM counts Tesla (NASDAQ:) among its customers for this line of chips. Given the wave of EV adoption, things could be rather promising here.
But let’s get back to the internet of things. As it stands now, STMicroelectronics is already number two in microcontroller chips globally, and the company is trying to reach number one. Not all microcontroller chips go into internet of things applications, and there’s stiff competition for the market from Texas Instruments, Infineon and others. Still, if you’re bullish on the space, STM stock is a key player. And at just over 14x earnings, you aren’t paying a very steep price to get involved.
American Tower (AMT)
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This next pick isn’t the best stock to invest in today as it’s been on an absolute tear lately. But it’s one to have on your watch list for any future market corrections. If you’re betting on the internet of things taking off, there’s one thing that is for certain — we’re going to need a lot more data service. And what better thing to invest in for that future than cellphone towers? Enter American Tower (NYSE:).
American Tower has grown to be an absolute empire, with a market cap of just over $100 billion. You make a lot of money owning the ubiquitous cellphone towers that make modern communications work. And American Tower owns plenty of towers — in fact, it has a jaw-dropping 171,000 communications sites located around the globe. Around 40,000 of those are in the U.S. and the rest are primarily in India and South America.
The company is driving consistent 16-17% annualized growth across a variety of metrics including cash flow, EBITDA and revenues. It’s pushing close to 20% annual dividend increases at the moment, making it an attractive mix of growth and income that is in front of an inevitable wave of even more data demand as 5G and the internet of things roll out globally. As I mentioned, AMT stock has already run up a ton over the past year, but this is one stock to invest in on any potential corrections in coming months.
Badger Meter (BMI)
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Badger Meter (NYSE:) also isn’t a household name for most investors. But a certain class of growth and income investors have great fondness for Badger Meter. Why’s that? Because BMI stock is one of the few U.S. companies to raise its dividend for more than 25 consecutive years through good times and bad.
Badger Meter is a leader in devices that measure the volume flow of liquids. This covers things ranging from oil to wastewater.
What’s that got to do with the internet of things? Good question. Badger Meter is now pushing radio-controlled meters heavily. These tend to drive two to three times as much revenue as analog meters read by a worker in the field. While electronic meters are already prevalent in the developed world, there is still not much adoption in emerging markets, giving Badger Meter a large runway to enjoy higher-priced sales going forward.
BMI stock isn’t a particularly exciting one in the short run. Over the long term, however, BMI stock has been an absolute home run. It has traded up from $4 (split-adjusted) at the turn of the century to just over $50 now. And there’s that amazing dividend track record as well. With the push to electronic radio-controlled meters in full swing, Badger should enjoy a solid revenue boost in coming years to aid its already highly attractive business.
Arlo Technologies (ARLO)
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Arlo Technologies (NYSE:) is the riskiest stock on this list — and you shouldn’t bet the farm on ARLO stock. But as a small speculative position, it could be worth a look here.
Why pick Arlo? The company is one of the leading consumer brands riding the internet of things trend. Arlo offers a variety of products to help its users live a so-called connected lifestyle. These include smart security lights, remote-controlled security cameras, baby monitors and smart doorbells, among other things. Home security and safety is a logical market for early adoption within the internet of things trend.
ARLO stock has gotten walloped over the past year. That’s in large part due to the company issuing lousy guidance earlier this year. ARLO stock tanked from $7 to $4 in one day and then traded around $4 for months. Recent market weakness has pushed ARLO stock under $3, making it a value play.
ARLO stock is now trading for less than 0.6x sales, which is minimal for a potential growing consumer products company. That said, Arlo is losing a considerable amount of money, and will run out of cash in a couple of years if things don’t improve. However, the company’s push to grow subscription revenue could boost Arlo’s valuation, and the company could also be an attractive takeover target for a larger tech company.
At the time of this writing, Ian Bezek owned TXN stock. You can reach him on Twitter at @irbezek.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.