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Are you frustrated with your stock
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picking results? Does it feel like no
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matter what strategy you go with, you
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always end up with a losing company?
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Many of us struggle between do I go with
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a value strategy or a growth strategy?
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And both have their pros and cons, but
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there are some clever ways that we can
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get the benefits from both in a single
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company. People gravitate to growth
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strategies because if a company is
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likely to grow their revenue and grow
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their profits a lot in the future, then
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obviously that makes for a great
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investment. The stock price should go up
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with it. The problem with that is if a
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lot of people believe it's going to
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grow, then they can push the stock price
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up too much. They can push it up beyond
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its growth prospects and now you've
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fallen into the growth trap. Now,
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there's also value traps. When I find a
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value company and it's undervalued, I'm
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thinking, "Hey, great. I'm going to get
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a stock price increase when the market
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prices this company where it should be
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because right now it's below its peers
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in terms of price to earnings or
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whatever metric you're looking at. The
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value trap though is sometimes companies
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are priced down for a reason and they're
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not going back up. So, how do I benefit
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from both growth and value in a single
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company? Most of us have heard the
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phrase, a rising tide lifts all ships.
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The same is true with the stock market.
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If I can find a sector or an industry
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that is on the rise, then the companies
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in that sector or in that industry are
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very likely to be brought up with the
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rise of that industry. The second step
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is to find companies in that industry
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that are undervalued compared to their
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peers. And this mitigates both the value
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trap and the growth trap. It's not
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likely to be a growth trap because it
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certainly isn't overvalued because I
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mean by definition we found an
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undervalued company. And then number
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two, it mitigates the value trap because
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a company that is undervalued in a
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growing industry is less likely to fail.
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It's less likely to lose revenue in the
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future because it is bolstered by the
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rising tide. Now, it's not impossible.
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There's still the chance that you could
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fall into a value trap or a growth trap,
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but it's less likely. We're all about
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mitigating the odds of failure. So, what
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industry am I looking at? I'm looking at
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the semiconductor industry and there's
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lots of companies that are in this
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industry. You've got the companies that
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produce the chips and then you've got
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the companies that manufacture critical
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components that allow those companies to
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produce those chips. So, there's tons of
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options within this industry and this
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industry is primed for a lot of growth.
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Right here, I've got the Deote 2025
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global semiconductor industry outlook.
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So, over the next 5 years, Deote
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predicts this industry is going to be up
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at $1 trillion. is currently sitting at
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about 700 billion. That is almost a 50%
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increase over the next 5 years. This
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whole industry is primed for lots of
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growth. So the next step is how do I
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find value companies within this
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particular industry. Now in this case I
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was clued into a company by Reddit which
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is rare. Wall Street Bets actually does
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good due diligence work from time to
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time. Yes, you have to filter through a
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lot of crap, a lot of jokes and memes,
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but every now and then you're going to
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find a diamond in the rough. And this
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guy, Virtual Seaweed, did a great due
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diligence piece on PLAB, which is
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photonics, but the ticker is PLAB. AI
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semiconductor component play is deep
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value. So, he gives a quick description.
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Photonix is a global leader in the photo
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mask industry, which is a critical
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component of semiconductor
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manufacturing. Virtual Seaweed looks at
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the company's financials, talks about
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their growth prospects, which I'm going
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to look into on my own here shortly. But
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one thing that he points out that is
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interesting to me is for the tariff
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traders. He says Photonix is uniquely
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shielded. The company operates a photo
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mask manufacturing facility in Boise,
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Idaho. So they are basically the only US
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domestic photo mask producer. And I'm
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going to go into their annual report
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shortly and look into where else do they
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have manufacturing. But first, I want to
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point out how I calculate whether or not
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a company is considered a value company.
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Some people will use price toearnings
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ratio. Some people will use earnings per
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share. There's lots of metrics that you
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could use. I personally like to use a
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discounted future free cash flow
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analysis to calculate the intrinsic
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value or my projected intrinsic value of
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the company. The reason I like to use
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free cash flow is because free cash flow
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is the chunk of money that a company
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uses to return value to shareholders.
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They can use that money to pay off debt,
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to acquire other businesses, to expand
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their operations, to pay a dividend, or
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buy back shares. So, I like to track
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this chunk, how much the company is
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projected to grow that chunk of money,
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and compare that to their share price
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along with a reasonable discount rate.
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And I do all of that on my automated
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spreadsheet right here. All I have to do
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is type in the ticker. The spreadsheet
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automatically pulls a bunch of
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information from
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stockanalysis.com, does the calculation
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for discounted future free cash flow,
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and then gives me intrinsic value
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calculations based on the analysts
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future projections for revenue. All that
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information comes from stockanalysis.com
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right here. So, Photronics is currently
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trading at
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$18.70. If I go to the forecast tab
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right here, I can scroll down to the
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analyst projections for revenue growth.
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Now, normally analysts will predict five
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years out. Unfortunately, in this case,
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they're only giving me two years of
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projections, but I've got a high,
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average, and low. The highest analysts
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are projecting 6% in 2025, 11% in 2026,
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and then the lowest are showing a
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revenue shrinkage of 1.6% and then small
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growth in 2026. The key to calculating
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or projecting the future free cash flow
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is to start with a decent projection. If
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I put in garbage, then I'm going to get
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out a garbage prediction. So, I like to
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start with the analyst projections. I
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like to also use the company's own
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forward revenue guidance. And then
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finally, I like to look at what is the
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sector's projected growth rate. There
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will be periods of growth and expansion
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where new photo mass technology is
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rolled out. There's going to be lots of
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buying. And then there's going to be a
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period where that buying is going to
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slow down until there's the next big
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development in the photo mask industry.
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So we see a little bit of cyclical
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revenue growth and then shrinkage. Even
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though semiconductors are projected to
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increase 6 or 7% every year for the next
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5 years, we might be on a down cycle for
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the photo mask industry specifically.
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And I want to look into a little bit
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more evidence that showcases that. Here
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I've pulled up the annual report from
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Photronics and the overview section. And
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if I scroll down just a bit, I can see
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capital expenditure schedule for the
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next year. So in 2024, 2023, and 2022,
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their capital expenditures was 130
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million in
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2024, 131 in 2023, and 112 in 2022.
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However, in 2025, they are projecting to
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spend 200 million. This is over a 50%
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increase in capital expenditures. This
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is a strong signal that Photronix is
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confident in the next cycle of photo
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masks. They are investing big money into
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capital expenditures and this is going
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to be the expansion of plants and the
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upgrade of their equipment in order to
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manufacture the next level of photo
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masks. The next item I want to point out
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on their annual report is the location
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of their manufacturing facilities. They
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have three that are owned in the US.
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They have one, two in China that are
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owned. They have three in Taiwan,
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Germany, Korea. The trade war is not
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likely to be a good thing for photonics,
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but at least they are positioned in a
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good spot with three manufacturing
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facilities in the US and three in China,
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which is where the highest tariffs are
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likely to be unless we come to an
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agreement. Next, I want to go to their
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investor presentation where they talk
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about their forward guidance for the
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next quarter of 2025. They're showing
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revenue between 208 and 216 million.
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Let's compare that to their 2025 first
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quarter. So on stockan analysis.com, if
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I go to the financials tab, look at
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their income, I can set it to quarterly.
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In Q1 of 2025, they had 212 million. If
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their revenue in quarter 2 is 28 to 216,
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the company is projecting pretty flat
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revenue for the next quarter. But over
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the next entire fiscal year, the
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analysts are projecting moderate growth.
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And that is shown right here in the
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forecast. Even though the next quarter
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seems to be slow, the average analyst is
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projecting 2.6 6 revenue growth for the
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fiscal year of 2025 and then that growth
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is projected to accelerate into 2026.
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When I calculate the intrinsic value
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using the future free cash flow, I
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typically like to take 5 years of
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analyst projections of future revenue. I
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multiply that by their historic free
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cash flow margin. Free cash flow margin
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is the percentage of revenue that a
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company is able to create free cash
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flow. So I take the margin, multiply it
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by the projected revenue, and then that
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gives me analyst projection for future
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free cash flow over the next five years.
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I then use a flat rate of increase for
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the 5 years after that and a flat rate
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of increase from 10 years into infinity.
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And those rates can be seen right here.
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So the next 5 years, years 6 through 10,
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I'm assuming 3% growth. This is just
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equal roughly to inflation. And the same
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for the perpetual growth rate, 3%. Now,
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these three projections right here are
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the analyst projections, and they are
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already looking really good. Oh, and I
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just realized I skipped a step. For the
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analyst projections, they only gave 2
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years. So, I had to put in my own
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estimates for the next 3 years. So, I
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tried to just give a reasonable a pretty
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tight range of high, medium, low, 5%
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growth for 2027 through 2029, 3% growth
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for average, and then a 3% decline in
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revenue for the lowest projection. So
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just be aware that these black numbers
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here, these are my own projections.
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These are the analyst projections. Those
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projections can be visualized right here
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with this graph. We can see the highest
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analyst projections show the revenue
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increasing and the lowest show the
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revenue decreasing. So even with that
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decreasing revenue over the next five
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years, if I then assume 3% growth after
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that, coming back in line with the next
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cycle of growth and then 3% growth into
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infinity on average, the lowest analyst
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projection shows an intrinsic value of
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$31 per share. The current share price
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is 18. So that gives me a 64% upside. If
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the average analyst is correct, then
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we're looking at a
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102% upside. I'm seeing huge upside
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potential with this company. I should
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also point out that this is including a
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discount rate of
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9.43% which I get that number from Alpha
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Spread. It calculates the cost of equity
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which takes into account the risk-free
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rate, the beta and the ERP for Photonix.
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It's basically taking into account the
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volatility and the risk with the
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risk-free rate adding those together and
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giving me a reasonable discount rate
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that I can use. So the more volatile a
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stock generally the higher the discount
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rate that I want. Also the higher the
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risk-free rate to make it worth it to
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take on the risk. So I'm using a
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9.43% discount. The stock price is still
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64% overvalued. Assuming the lowest
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analyst is correct. I'm also assuming
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that the past free cash flow margin.
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This is 14.42%. This is the margin that
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I'm using. This is the average for the
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past 5 years. I'm also assuming that
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that average will continue forward. And
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right here we can see a visualization of
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that. In 2020 and 2021, the free cash
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flow margin was low. In 2022, 2023, and
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2024, it was high. So, I'm just going
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with the average kind of right down the
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middle. The next thing I want to look at
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is this adjustment right here. So, I
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like to adjust the free cash flow by a
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percentage of the R&D, a percentage of
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the capital expenditures, cash
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acquisitions, and stock compensation for
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R&D and capital expenditures. These two
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values are subtracted against free cash
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flow. However, some companies are
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benefiting from their R&D and their
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capital expenditures and some companies
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are not. Some companies just have to
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continue pumping money into these
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categories just to stay up with the
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competition. I have decided to give
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Photonix credit for 20% of their R&D and
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20% of their capital expenditures
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because a portion of these expenses are
00:12:10
going towards growth. Why do I believe
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that? Well, if I go back to their annual
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report, they say right here, we intend
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to continue to make the required
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investments to support the technological
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requirements for our customers that we
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believe will continue to enable our
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growth. And they are spending 200
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million in fiscal year 2025 for that
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purpose. Additionally, when I go to
00:12:30
their annual report, their revenue is
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reflecting strength in the higherend
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photo masking capability, which is
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offset by the weakness in the older
00:12:39
geometries. So once again this is
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showing evidence of the cyclical nature
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of this industry. The older geometries
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are starting to fade and now they are
00:12:47
preparing for a boom in the newer
00:12:49
geometries. That is why I'm giving them
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some credit for their capital
00:12:52
expenditures. I believe this is going to
00:12:54
be a critical part of their future
00:12:56
growth. I'm also putting against cash
00:12:58
acquisitions which they actually don't
00:13:00
have any cash acquisitions. So I can
00:13:02
just go ahead and make that zero. And
00:13:03
then I am counting against 90% of their
00:13:07
stockbased compensation. The only reason
00:13:09
I don't take 100% of their stock-based
00:13:12
compensation against their free cash
00:13:14
flow is stock-based compensation has
00:13:16
some unique advantages over just paying
00:13:19
your employees in straight cash. If your
00:13:21
high value employees are incentivized to
00:13:25
make the company grow, then they're
00:13:26
going to in theory perform better. And
00:13:28
paying your employees with company stock
00:13:30
aligns their incentives with the company
00:13:33
incentives. So as a result, I allow 10%
00:13:36
of the stockbased compensation to
00:13:38
increase the free cash flow because
00:13:40
normally stockbased compensation goes to
00:13:43
increase their free cash flow. After all
00:13:44
those adjustments, I'm showing a new
00:13:46
free cash flow margin average over the
00:13:48
last 5 years of 16.85, which is 2%
00:13:53
higher than their current free cash flow
00:13:55
margin that I'm using. So if I put a two
00:13:57
into this category, it pushes up my
00:14:00
intrinsic value even further. Now I'm
00:14:01
seeing an 83% upside with the lowest
00:14:05
analyst projections right here and a
00:14:07
152% upside with the highest analyst
00:14:10
projections. Now in my mind this is a
00:14:13
little bit overly optimistic. So I want
00:14:15
to plan for revenue reduction over the
00:14:17
next 5 years. I also want to plan for a
00:14:19
free cash flow decline over the next 5
00:14:22
years because they are spending more
00:14:24
money on capital expenditures and
00:14:26
capital expenditures goes against free
00:14:28
cash flow. So, because of that, I'm not
00:14:31
going to give them any more credit. I'm
00:14:32
going to try to be a little bit more
00:14:33
conservative. I'm going to put a zero in
00:14:34
that box. Bring it back down. I'm also
00:14:37
going to assume 1% free cash flow margin
00:14:40
decline every year for the next 5 years.
00:14:42
And that can be seen right here. The red
00:14:45
is the average. The yellow is the line
00:14:47
that I am calculating. That brings my
00:14:49
lowest analyst projection down to 21%. I
00:14:53
also want to decrease the 5 years after
00:14:56
that to 0%. So now the projection is
00:15:00
over the next 5 years we have revenue
00:15:02
dropping a little bit every year in line
00:15:04
with this projection right here minus
00:15:06
1.1 up 1.2 and then down three down
00:15:09
three down three then the 5 years after
00:15:11
that zero revenue growth and then
00:15:13
increasing with inflation even by
00:15:15
dropping down all of those values I'm
00:15:17
still seeing a low analyst projection of
00:15:20
13% upside on top of the discount rate
00:15:24
of 9.43% 43%. But with the lowest
00:15:27
analyst projections, this company still
00:15:28
looks so good. The final thing I want to
00:15:30
check is, does this company have any red
00:15:33
flags? I have an automated Warren
00:15:35
Buffett red flag checker. I read one of
00:15:37
Warren Buffett's books on analyzing the
00:15:40
financials of a company. And there are
00:15:41
several red flags that he looks for in
00:15:43
the company. And I have those
00:15:44
automatically calculated right here. If
00:15:46
a cell highlights red, it's a red flag.
00:15:48
If it highlights green, then it's a
00:15:50
green flag. It means the company is
00:15:51
likely to have a durable competitive
00:15:54
advantage. And then if the cell is
00:15:55
white, then it's neutral. So I'm not
00:15:57
seeing any red flags except for capital
00:16:00
expenditures. Warren Buffett does not
00:16:02
like to see a high percentage of capital
00:16:05
expenditures compared to earnings. And
00:16:07
this company is very capital intensive.
00:16:09
So if they have one red mark, it would
00:16:11
be their capex. But I'm willing to look
00:16:14
past the high capital expenditure
00:16:16
because they are going into a growth
00:16:17
cycle and they have to invest a lot of
00:16:20
capital into having the next high-end
00:16:23
photo masking capability. So with that
00:16:25
in mind, lots of green flags, zero red
00:16:28
flags. In these graphs, I'm seeing
00:16:29
profit going up every year, earnings per
00:16:31
share going up every year. Their
00:16:33
inventory is trending up with their
00:16:36
profits, which is good to see. Their
00:16:38
retained earning is always going up.
00:16:40
That's good to see. Their debt is going
00:16:42
down while their cash is going up.
00:16:44
That's also a really strong indicator.
00:16:46
And finally, their shares outstanding
00:16:48
have been going down slightly over the
00:16:50
past 5 years, but it's really over the
00:16:52
last 3 years, it's been flat or slightly
00:16:54
going up. So, tons and tons of green
00:16:57
flags. This company looks really strong.
00:16:59
Normally, when a company is so
00:17:00
undervalued, it's because they're not
00:17:02
very profitable or they have lots of red
00:17:04
flags, but I'm just not seeing it with
00:17:06
Photronics. So, I'm going to be
00:17:08
investing $100 into this company. This
00:17:10
is my YouTube investing portfolio series
00:17:13
where I invest $100 into a different
00:17:15
company every week. Now, I quickly want
00:17:17
to go over my existing portfolio. We
00:17:18
started this series in December of 2024,
00:17:21
and we have invested in 16 companies so
00:17:23
far. Votronics will be the 17th company.
00:17:26
We are currently about flat. We're down
00:17:28
$50 in total on 1,900 invested. After I
00:17:33
invest in Photonix, it'll be 2,000. And
00:17:35
we have a money weighted rate of return
00:17:37
of down 3.8%. And I am happy with these
00:17:40
results so far. If I look at where we
00:17:42
started in December of 2024, the S&P 500
00:17:46
is down almost 10% in that time. So,
00:17:49
we're outperforming the S&P, which is
00:17:51
always good. That's kind of the
00:17:52
benchmark that I like to look at. And
00:17:54
here are the companies that we've
00:17:55
invested in. A little less than half of
00:17:57
them are up, but the other half are
00:17:58
down. Companies that are doing well so
00:18:00
far are British American Tobacco, Hens,
00:18:03
Adobe, ASML, Capital One Finance, Crocs,
00:18:07
and Canadian Pacific and Natural Gas.
00:18:09
The companies that are doing the worst
00:18:10
are Docuign, Google, and Zeta. The one
00:18:14
that surprises me the most is Google.
00:18:16
This company is looking so strong. This
00:18:18
is one that I'm very tempted to double
00:18:20
down on. In fact, I'm thinking about
00:18:21
doing a video where I go through my
00:18:24
existing holdings that are down and
00:18:26
decide which ones do I want to double
00:18:28
down on because they're even cheaper
00:18:29
than what I thought they should be when
00:18:30
I initially invested and then which
00:18:32
ones, if any, should I pull the plug on.
00:18:35
If you'd be interested in seeing a video
00:18:37
like that, let me know in the comments.
00:18:39
But for now, I'm continuing to invest in
00:18:41
companies that are value companies but
00:18:44
still have growth prospects. The method
00:18:47
in this video is finding companies in a
00:18:49
growing industry or sector and then
00:18:51
finding value companies within that
00:18:53
industry. But there are other ways of
00:18:55
combining growth and value. If you'd
00:18:57
like to see another method, you can
00:18:58
check it out right here. Hope to see you
00:19:01
there.
00:19:09
Cheers. This is a good one. Henry
00:19:12
McKenna aged 10
