Core Viewpoint - Growth investors seek stocks with above-average financial growth, but identifying such stocks can be challenging due to their inherent risks and volatility [1] Group 1: Company Overview - Fabrinet (FN) is highlighted as a recommended growth stock with a favorable Growth Score and a top Zacks Rank [2] Group 2: Earnings Growth - Fabrinet has a historical EPS growth rate of 23.7%, with projected EPS growth of 30.6% this year, surpassing the industry average of 26.7% [5] Group 3: Cash Flow Growth - The year-over-year cash flow growth for Fabrinet is 12.6%, significantly higher than the industry average of -12.1% [6] - The annualized cash flow growth rate for Fabrinet over the past 3-5 years is 20.6%, compared to the industry average of 5.4% [7] Group 4: Earnings Estimate Revisions - The current-year earnings estimates for Fabrinet have increased, with the Zacks Consensus Estimate rising by 9.8% over the past month [9] Group 5: Investment Positioning - Fabrinet has earned a Growth Score of B and a Zacks Rank 2 due to positive earnings estimate revisions, positioning it well for potential outperformance [11]

Group 1: Fund Performance - The FPA Queens Road Small Cap Value Fund returned 7.46% in Q3 2025, underperforming the Russell 2000 Value Index which returned 12.60% [1] - For the first three quarters of 2025, the fund achieved a return of 13.77%, outperforming the index's return of 9.04% [1] Group 2: Fabrinet Overview - Fabrinet (NYSE:FN) specializes in optical packaging and precision manufacturing services, with a one-month return of -4.85% and a 52-week gain of 76.79% [2] - As of November 24, 2025, Fabrinet's stock closed at $462.67 per share, with a market capitalization of $16.576 billion [2] Group 3: Fabrinet's Market Position - Fabrinet dominates its niche in optical networking equipment and has shown impressive historical revenue growth and increasing operating margins [3] - The company has a significant customer in Nvidia, which accounts for 10% of its revenue, and has seen its stock price double since April due to rising expectations for data center spending [3] - Fabrinet is expected to continue being a "compounder" in the market, with ongoing demand for high bandwidth networking [3] Group 4: Revenue and Hedge Fund Interest - Fabrinet generated $978 million in revenue for fiscal Q1 2026, marking a 22% year-over-year increase and an 8% increase from the previous quarter [4] - The number of hedge funds holding Fabrinet decreased from 38 to 32 from the previous quarter [4]

Summary of Key Points from the Conference Call Industry Overview - **Industry Focus**: IT Hardware and Communications Equipment, specifically custom ASICs, servers, PCs, and smartphones [1][2][3] Core Insights - **Custom ASICs Growth**: Strong positive sentiment regarding custom ASICs, particularly in AI servers, with expectations for a better long-term compound annual growth rate (CAGR) for general-purpose servers [2][4] - **Power Solutions**: Increasing importance of power management solutions in AI racks, with companies focusing on integrating full compute racks [2][9] - **PC and Smartphone Stability**: The PC market appears stable, while iPhone production remains unchanged, with no significant upward revisions expected [2][13] Company-Specific Insights Celestica Inc. (CLS) - **TPU Contribution**: CLS is expected to be the primary EMS partner for TPU, with projections indicating that TPU will represent 70-75% of the Enterprise segment by 2025 [5][21] - **Revenue Estimates**: FY26 revenue estimates for CLS's Enterprise segment have been increased from $2,752 million to $3,782 million, with an overall price target raised to $359 [5][16] - **Growth Projections**: Revenue growth projected at a CAGR of 30.3% from 2024 to 2027, with net income expected to reach $1,326 million by 2027 [21] Fabrinet (FN) - **Market Position**: FN is positioned as a second source for TPU, with revenue estimates for FY26 increased from $146 million to $243 million due to a larger total addressable market (TAM) [11][27] - **Revenue Growth**: Projected revenue growth at a CAGR of 23.5% from 2025 to 2028, with net income expected to reach $699 million by 2028 [27] Jabil (JBL) - **Test Equipment Growth**: JBL is expected to benefit from growth in the test equipment market for GPUs, with FY26 estimates for semi-cap equipment rising to $2.9 billion from $2.5 billion in FY25 [6][15] Flex Ltd (FLEX) - **Power Systems Exposure**: FLEX has significant exposure to power systems, with 25-30% of its $6.5 billion data center revenues in FY26 coming from these solutions [12][15] - **Market Position**: Expected to see upside in business throughout 2026, particularly in full rack manufacturing [5][15] Risks and Challenges - **Celestica (CLS)**: Risks include customer concentration, loss of programs to competition, and potential slowing of AI spending [18][68] - **Fabrinet (FN)**: Risks include a slowdown in AI spending, lower outsourcing activity, and increased competition [20][74] Valuation and Price Targets - **Celestica Inc. (CLS)**: Price target set at $359 based on a 32x FY27 EPS of $11.21, reflecting a positive mix shift and rising ODM/HPS content [17][67] - **Fabrinet (FN)**: Price target set at $499 based on a 30x FY27 EPS of $16.64, accounting for the AI investment cycle [19][73] Conclusion - The IT Hardware and Communications Equipment industry is experiencing growth driven by custom ASICs and AI-related investments, with specific companies like CLS and FN positioned to benefit significantly. However, potential risks related to market dynamics and competition remain a concern.

Core Insights - U.S. stocks experienced a rally in Q3, supported by the Federal Reserve's interest rate cut and steady economic data, with the Russell Midcap® Growth Index increasing by 2.78% [3][17] - The Wasatch U.S. Select Fund underperformed, declining by -1.93%, primarily due to concentrated holdings in stocks that faced slower revenue growth [3][4][17] Fund Performance Analysis - The Fund's performance was negatively impacted by a few concentrated stock holdings that reported slower revenue growth, leading to significant declines in their stock prices [4][6] - The investment strategy focuses on high-quality, long-duration growth companies, which faced headwinds as low-quality stocks gained favor in the market [7] Key Detractors - BellRing Brands, Inc. (BRBR) was the largest detractor, with concerns over competition in the protein shake category; however, the long-term outlook remains positive due to category growth potential [8] - Shift4 Payments, Inc. (FOUR) faced stock price declines despite solid organic revenue growth, attributed to macroeconomic concerns and investor sentiment following its acquisition of Global Blue [9] - Inspire Medical Systems, Inc. (INSP) was sold during the quarter after management downgraded guidance due to delays in product rollout, raising execution concerns [10] Top Contributors - Medpace Holdings, Inc. (MEDP) was the top contributor, with strong revenue and earnings growth, raising full-year guidance despite a slowdown in biotech funding [11] - Fabrinet (FN) benefited from strong product adoption, particularly in data centers linked to AI, although the investment is not solely based on AI themes [12] - Nova Ltd. (NVMI) also contributed positively, with a strong track record in semiconductor manufacturing, benefiting from increasing complexity in the industry [13] Future Outlook - The Fund remains committed to its investment philosophy, focusing on high-quality growth companies despite recent underperformance [14] - The fundamentals of the companies within the Fund are encouraging, with strong earnings growth expected to drive return potential over a three- to five-year horizon [15]

Investment Rating - The report maintains an "Outperform" rating for the communication industry, indicating an expected growth exceeding the benchmark index by over 10% [39]. Core Insights - North American optical communication manufacturers have released positive earnings guidance for the upcoming quarter, with Coherent reporting Q1 2026 revenue of $1.58 billion, a 17% year-over-year increase, driven primarily by data center optical communication [14][17]. - Lumentum's Q1 2026 revenue reached $530 million, up 58% year-over-year, with strong demand for 800G and 1.6T high-speed optical modules, leading to anticipated price increases starting in 2026 [15][17]. - Fabrinet reported Q1 2026 revenue of $980 million, a 22% year-over-year increase, with significant growth in the telecom optical communication sector, particularly driven by DCI [16][17]. - The North American AI market demand is expected to grow, with NVIDIA's GB300 shipments boosting demand for 1.6T optical modules, suggesting a strong revenue increase for leading optical module manufacturers in Q4 [17]. - The launch of the ScaleX640 by Zhongke Shuguang at the Wuzhen Internet Conference showcases advancements in domestic ultra-node technology, with a design that significantly enhances cabinet density and cooling efficiency [18]. Summary by Sections Industry Trends - North American optical communication companies are experiencing robust order growth, particularly in the data center segment, with a focus on 800G and 1.6T technologies [14][17]. - The supply of optical chips remains a bottleneck, prompting companies to expand production capacity to meet future demand [14][17]. Company Performance - Coherent's data center business is expected to accelerate growth, with a projected 10% quarter-over-quarter increase in the next quarter [14]. - Lumentum anticipates a 20% quarter-over-quarter revenue growth in the upcoming quarter, excluding certain orders [15]. - Fabrinet expects Q2 revenue to reach approximately $1.1 billion, driven by growth across various segments including traditional telecom and DCI [16]. Market Overview - The overall market saw an increase during the week of November 3-7, 2025, with the Shanghai Composite Index rising by 1.08% and the communication index increasing by 0.92% [19]. - The optical module sector led the weekly gains with a 4.37% increase, indicating strong investor interest [19]. Recommended Companies - Key companies to watch include those in the optical module sector such as Zhongji Xuchuang and Tianfu Communication, as well as domestic ultra-node manufacturers like ZTE and Unisoc [19].

Group 1: Robinhood Markets, Inc. (HOOD) - The company has a Zacks Rank of 1 and a Momentum Score of A [1] - The Zacks Consensus Estimate for its current year earnings increased by 21.9% over the last 60 days [1] - Robinhood's shares gained 19.6% over the last three months, while the S&P 500 declined by 5.9% [1] Group 2: Fabrinet (FN) - The company has a Zacks Rank of 1 and a Momentum Score of A [2] - The Zacks Consensus Estimate for its current year earnings increased by 8.6% over the last 60 days [2] - Fabrinet's shares gained 40.5% over the past three months, compared to the S&P 500's decline of 5.9% [2] Group 3: TE Connectivity plc (TEL) - The company has a Zacks Rank of 1 and a Momentum Score of A [3] - The Zacks Consensus Estimate for its current year earnings increased by 7.7% over the last 60 days [3] - TE Connectivity's shares gained 24.4% over the last three months, while the S&P 500 declined by 5.9% [3]

Group 1 - Tactile Systems Technology, Inc. (TCMD) has seen a 29% increase in the Zacks Consensus Estimate for its current year earnings over the last 60 days [1] - Harmony Gold Mining Company Limited (HMY) has experienced a 12.7% increase in the Zacks Consensus Estimate for its current year earnings over the last 60 days [1] - Robinhood Markets, Inc. (HOOD) has reported a 21.9% increase in the Zacks Consensus Estimate for its current year earnings over the last 60 days [2] - Fabrinet (FN) has seen an 8.6% increase in the Zacks Consensus Estimate for its current year earnings over the last 60 days [2] - TE Connectivity plc (TEL) has experienced a 7.7% increase in the Zacks Consensus Estimate for its current year earnings over the last 60 days [3]

Core Insights - The Zacks Electronics - Miscellaneous Components industry is experiencing growth due to automation and increased spending in sectors like semiconductors, automobiles, and healthcare, with companies like TE Connectivity, nVent Electric, and Fabrinet positioned to benefit from AI and IoT advancements [1][3][4] - However, the industry faces challenges from global macroeconomic conditions, end-market volatility, higher tariffs, and geopolitical tensions, particularly between the U.S. and China [1][5] Industry Overview - The industry includes companies that provide various electronic components and accessories, serving markets such as telecommunications, automotive electronics, medical devices, and consumer electronics [2] - Key customers are original equipment manufacturers, independent distributors, and electronic manufacturing service providers [2] Trends Impacting the Industry - Automation is a significant driver, with demand for faster and more efficient electronics leading to increased use of control systems and collaborative robots [3] - Miniaturization in semiconductor manufacturing is creating strong demand for advanced packaging and new manufacturing materials [4] - Geopolitical tensions, particularly the U.S.-China trade restrictions, are negatively impacting the industry, especially regarding semiconductor supply [5] Industry Performance - The Zacks Electronics - Miscellaneous Components industry ranks 62, placing it in the top 25% of over 250 Zacks industries, indicating bullish near-term prospects [6][7] - The industry's earnings estimates have increased by 9.4% since June 30, 2025, reflecting positive sentiment among analysts [8] Stock Market Performance - The industry has outperformed the S&P 500 and the broader Zacks Computer and Technology sector, appreciating 35.3% over the past year compared to the S&P 500's 14.2% and the sector's 24.9% [10] Current Valuation - The industry is currently trading at a forward P/E ratio of 23.45, slightly above the S&P 500's 23.30 but below the sector's 28.61 [13] Notable Companies - **TE Connectivity**: Expected to benefit from strong demand in AI and energy applications, with a projected 11% organic sales growth to $4.5 billion in Q1 fiscal 2026 [17][18] - **nVent Electric**: Anticipates 31-33% sales growth in Q4 2025, driven by acquisitions and strong data center orders [22][23] - **Fabrinet**: Forecasts 29% year-over-year revenue growth in Q2 fiscal 2026, with strong performance in non-optical communications [26][27]

Core Insights - The article emphasizes the focus on growth and momentum stocks that are reasonably priced and expected to outperform the market in the long term [1] - It highlights a significant investment opportunity, noting that the S&P 500 increased by 367% and the Nasdaq by 685% from March 2009 to 2019, indicating a strong recovery from the financial crisis [1] Investment Strategy - The investment strategy involves long-term investment in quality stocks, with the use of options to enhance returns [1] - The approach aims to assist investors in generating wealth through high-quality growth stocks [1]

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