Is Universal Display a Universal Winner?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Buy what you know
No doubt based on my interest in the electronic equipment, instruments, and components sector, where I've rated companies such as JDS Uniphase, Mellanox, and InvenSense to outperform the broad indexes, the CAPS supercomputer thought I also might be interested in another electronics-components maker, this time Universal Display (NAS: PANL) , the leading maker of OLED screens. It was one of five Stocks of the Day that it offered up for my consideration this week.

Considering TV shipments fell last year for the first time since 2004, and NPD DisplaySearch expects there to be a long-term global sales decline of 8% for LCDs by 2015, let's see what Universal has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

Universal Display snapshot

Source: S&P Capital IQ.

Rise of the robots
LCD screens may be on the decline, but they're being replaced by OLED screens, next-generation organic light-emitting diode technology that offers the best combination of LCD and plasmas. Market researchers expect OLED to quadruple its market share to 16% by 2015, and as exciting as that potential is, the technology also has big implications for mobile computing.

According to the Fool's Anders Bylund, one of the biggest proponents of Universal's leadership potential, OLED screens now make up 20% of all small- and medium-sized digital displays, a market that includes the low-end LCD displays found in today's feature phones. The battle between Samsung and Apple (NAS: AAPL) for smartphone superiority underscores the crux of the situation.

Samsung's Galaxy S3 phone features Universal Display's OLED screen, and its ever-widening popularity ensures it will keep receiving material orders. That Samsung's management boosted the top end of its revenue guidance 10% to $110 million means the smartphone maker doesn't expect demand to soften anytime soon.

The report also suggests that Apple is worried about losing share to Samsung, since it's seeking to ban imports for the S3 and Note, which also uses the OLED screen, following its patent infringement case victory.

OLED TV screens are still an expensive proposition, and LG Display (NYS: LPL) , which uses Kodak's alternative white OLEDs with color filter process, is holding off on ramping up volume production of a 55-inch screen until all the bugs can be worked out (LG extended a supply agreement with Universal earlier this year). The 55-incher would be the largest OLED screen on the market, but Sony (NYS: SNE) and Panasonic (NYS: PC) are expanding their own screen sizes too to meet market demands.

It's not quite the Jetsons
At 26 times earnings estimates, Universal seems a bit expensive at these levels, even when you look at ebullient analyst growth prospects. Add in that its enterprise value trades at 80 times its free cash flow, and the gains its made have richly rewarded it but don't make it a buy right now.

Although its large presence dominates smartphones, with the TV market lagging (through no fault of its own), I'd hold off on staking a claim here just yet. The Motley Fool CAPS community might disagree, as 94% of the nearly 1,300 members weighing in on the OLED screen specialist think it will outperform the broad indexes, but let me know in the comments box below if your outlook is just as crystal clear.

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The article Is Universal Display a Universal Winner? originally appeared on Fool.com.

Fool contributorRich Dupreyowns shares of Apple, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Apple and Universal Display.Motley Fool newsletter serviceshave recommended buying shares of Apple and Universal Display and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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