CES insight: consumer electronics stocks you should and should not buy this year

Everyone is wrapping up their CES coverage with lists of "Best of Show" products or "Coolest gadget" write-ups. I thought that while we're waiting for the opening of MacWorld tomorrow, I'd do something a little different. I'm going to list the products, marketing, and companies I saw at the show that you should stay away from; think of this as my list of "stocks you shouldn't buy in 2006". So without further ado, here are my reactions to the tyranny of too much blather, hype, and overwrought keynotes of CES:

• Reject any "convergence" device. Too many companies are trying the "it's a floor wax AND it's a dessert topping" approach to electronics. Consumers don't buy convergence; they buy products that solve a problem or fill a real need. So while you can expect consumers to buy TVs or DVD players, you shouldn't expect to make a product that combines a TV, a cell phone, a wireless router, and a gaming console into one device to be a success. Consumers don't want the complexity, and the complexity of functions make the systems impossible to market.



• Stay away from the US telcos. All the major American carriers have dreams of becoming your next cable company. Judging from the terrible high-def images Verizon was showing at the show and the $100 billion or so it will take them to roll out fiber to your home, this is presently a pipe dream -- and shareholders and phone line subscribers will be the ones to pay for it. With traditional phone service declining under the onslaught of both wireless and VOIP, these guys are running out of monopolies to milk. They'll be bad investments for the foreseeable future, even though they pay decent dividends.



• Don't invest in futuristic digital home dreams. Bill Gates can have a digital home because he can and will pay millions to have it professionally designed, installed, and run. Ordinary consumers, not so much. Despite the hype, what most consumers want is a great video and music experience they can understand and control themselves. That's why products like the Apple iPod -- still sold as a music player -- sell well and Swiss Army knife products don't.



• Companies that rely on an "ecosystem" to succeed.. The model of one company making hardware, another writing software, and yet another company branding and selling the product almost never works (the PC industry is an exception and only thrives because businesses dominate PC purchases and support, not consumers). Consumers want one company to stand behind all aspects of their buying experience, and that just doesn't happen with an ecosystem approach. And investors wanting to buy into an ecosystem can't easily know which companies will make the majority of the profits from the ecosystem while others lose money hand over fist.

So given all the no-nos, what should you invest in? Here are my US consumer electronics picks for the year. I will revisit the calls at the end of the year to see how I did, but these feel like the big winners after CES.

1. Jaw-dropping products designed to solve one consumer problem. A clear consumer problem, Zen-simple products that solve that problem, and great design combine to cut through the clutter and confusion of consumer electronics. Apple (symbol AAPL) is the stock that defines this category, but the Motorola (symbol MOT) H5 Miniblue headset is another. In fact, I'm encouraged that Motorola is now on the comeback trail overall with its RAZR phones and other soon-to-arrive products, so they are an overall pick for this category.



2. Flat panel manufacturing leaders. The flat panel business is a lot like the chip business: the companies that make the multi-billion-dollar investments to fab the best panels win most of the revenue and garner good profits to boot. Our #1 pick here is Matsushita (US ticker symbol MC) for their plasma leadership and LG Phillips LCD manufacturing (US ticker symbol LPL) for LCDs. I would also recommend Sharp and Samsung, but their shares are only available as ADRs in the US, and as such aren't as transparent an investment.



3. GPS navigation systems. If you don't own a car navigation system now, you will sometime in the next few years. Why? Because for men, they eliminate the need to stop and ask for directions and for women, they take a lot of the worry out of driving. The big leaders here are Garmin (symbol GRMN) for portable units and Pioneer Electronics (symbol PIO) for the best aftermarket and OEM systems. Pioneer also makes some of the best (and most expensive) plasma panels as well, so they are a double pick.

As a final note, it is no accident that fully half of these picks are outside the US. With the Chinese moving their foreign exchange reserves out of dollars to euros and yen and the Japanese economy recovering, I expect the dollar to declihe this year. As a result, I expect that companies like Pioneer, Matsushita, and LG Phillips LCD should perform even better in the US market than in their native stocks due to changing exchange rates.

Full disclosure: I own shares of Apple, but have no positions in any of the other stocks mentioned in this article.

Technorati Tags: Analysis, Apple, CES, Consumer Electronics, Consumers, Flat Panels, Garmin, Motorola, Navigation systems, Pioneer, Samsung, Stocks, Technology, Telecom, Verizon