As of May 14, Leeb is also now pitching this as a major holding of the “other Oracle of Omaha”, though the rest of the ad is mostly unchanged… that’s a reference to fund manager Wally Weitz, who I mention more below and whose funds are large holders of the stock teased.
Stephen Leeb has a new pitch out for his Brain Trust Profits letter (edited by Scott Chan), and it’s all about how to catch the next wave of social media profits.
Which is probably a bit poorly timed, given the recent collapse of Twitter and of so many of the social media stocks after their bubblicious run, but certainly interactive and crowd-sourced information is growing online by leaps and bounds, a lot of social media companies are nicely profitable, and connecting with other people remains one of the huge benefits of the internet (heck, I guess we’re even a bit of a “social media” business here at Stock Gumshoe, though, surprisingly enough, the fat cat private equity investors have not been hiking up Gumshoe Mountain to have a chat with yours truly… perhaps the moat and the alligators are scaring ’em off).
But we always do delight in sniffing out new stock ideas for you, so let’s find out what Leeb is selling. Here’s how he gets our motors revving:
“Online Dating is Hotter than Ever…
“But the profits are nothing compared to what’s coming NEXT.
“If you missed Match.com’s rise, no worries, because if you get in front of this mega-trend you stand to gain much more!
“Not only did companies like Match.com help revolutionize one of mankind’s oldest rituals, it made investors a mint in the process.
“That’s why I am writing to you today…
“The Biggest Social Media Opportunity EVER?
“You see, online dating has paved the way for my top secret pick: A web and media innovator that has reshaped two entire industries and is poised to hand investors immense profits.
“This web phenomenon picks up right where online dating leaves off—and is going much, much further.”
Intrigued? Of course! So what’s he talking about?
“The first industry my top pick has transformed was once a seasonal, side business for many.
“Today it is an all-season, mega-industry fueled in part by new technology and social media.
“I’m talking about the booming NEW wedding industry.”
Spending on weddings has continued to balloon in the United States, and Leeb says it is now no longer seasonal (people get married year-round to a much greater degree now), and the “production” of weddings, including all the associated days around the event and the guest services, has only gotten more ridiculous. And, of course, men are now dramatically more involved in weddings than they used to be, giving them more people to market to.
Hard to argue with that — I’ve been married for 15 years, but even back when Mrs. Gumshoe and I entered bliss we remarked on the silliness of the wedding economy… “One large round tiered cake to feed 100? That will be $120. Oh, it’s for a wedding? I’m sorry, I mean to say $900!”
More from Leeb:
“My favorite pick offers an extensive portfolio of wedding themes, locations, local vendors, reviews — and the mobile app to make it all happen. So, if an engaged couple in Michigan dreams of a Key West “island” wedding, my top-secret pick holds the key….
“My Top Secret Pick “Owns” The Wedding Industry: 80% of US Engaged Couples Go Here!
“The co-founder of my favorite pick claims 80% of American couples planning a wedding use their web and mobile-based service.
“Called ‘the chicest site in cyberspace’, those who enter it have access to a blizzard of tips, ideas and videos on everything from dresses, venues, and invitations to gift registries, receptions, vendors and so much more.
“Not only that, it offers 1,000+ accessories, favors, books, attendant gifts, and more, along with a directory of 150,000 vendors nationwide. Friends, families and guests can conveniently purchase merchandise right on the site. The online bridal sales market potential alone is estimated at $1 billion — and my top-secret pick “owns” this space. Pardon the pun, but advertising revenue is icing on the cake for my top-secret pick.”
And apparently this secret stock has expanded overseas as well, bringing wedding ridiculousness to a whole new population:
“In fact, this stellar outfit has grown so much by catering to couples here in America, it launched a similar service in China, targeting the estimated 12 million Chinese couples who will marry this year.
“The result: Its Chinese portal has already become the top online wedding media in the country!”
And Leeb says that it doesn’t stop at weddings …
“You see, not only is this microcap a wellspring of crucial information for enagaged couples, its sister service provides the same blizzard of guides, tips, apps and tutorials for expectant parents.”
So who is it?
This is XO Group (XOXO) — cute ticker, right? They used to be known as TheKnot.com, ticker KNOT, which was started up right near the peak of the late-1990s dot com explosion. The company really took control of the online wedding media business when they bought out competitor WeddingChannel.com back in 2006, but they renamed themselves when they moved over to the NYSE from the Nasdaq a few years ago and started to focus on growing their newer services, largely TheNest.com (for cohabiting couples learning to live together in hipness and harmony) and The Bump.com (for new and expectant parents who mistakenly believe they can prepare for the craziness of parenthood). In addition to the websites and mobile and social apps, they also publish wedding magazines and run trade shows for the industry — all of those businesses are tiny compared to the core web properties, but I guess they must help to expand the brand awareness.
They now call themselves a “lifestages” company, which means they can serve up a pretty appealing mix for potential advertisers — lots of ready buyers making big and expensive life transitions to new partners, new homes, or expanded families. TheKnot.com is still the heart of the business, and it seems like this should be a money-gushing company, but they’ve been having a rocky time for a couple years and the shares have come down — overall performance peaked for KNOT back in 2006, and XOXO has never really approached the 90 cents per share that the company earned that year during the early days of what seemed to be an unstoppable growth engine (2013 earnings were about 23 cents).
So what’s the problem? Well, revenue has been flat for the last couple years — and in the fourth quarter last year, they boosted spending quite a bit and didn’t make a profit. That boost in spending and their recent transition to a new CEO (the co-founder and former CEO, David Liu, is switching to focus on strategic growth, particularly in China) are part of what they hope will be a reinvestment in future growth — they’ve particularly been building up their mobile offerings, including more powerful wedding planning apps for smart phones, and on growing their brand in China to feed the mythology of the perfect wedding to the next generation of new consumers.
Sorry, didn’t mean to make that sound cynical. I had a great time at my wedding, I just don’t so much like other people’s weddings.
Which means the company is in a transition — investing in growth, looking to boost the future, and getting more personalized and local with their marketing (national brand advertising was down for them last quarter, local ads were up). I don’t know if it will work or not, but even in a fairly weak year earnings-wise they have had decent free cash flow and they added to a substantial cash balance (they now have about $90 million in cash on the books and no debt, pretty impressive for a $250 million market cap company), so the company isn’t in stress as far as the balance sheet goes. But if they want the stock to go up, they’re going to have to hope that their current investments in China and in mobile do boost the top line before too long. Companies that are in transition usually have interesting conference calls, you can see the latest XOXO call transcript here if you want to get a better idea of how they’re investing and planning.
What caught my eye at first when looking at this one is that Wally Weitz’s firm owns just under 10% of the shares (if his name isn’t familiar, there was a nice profile of Weitz Funds in Barron’s in January), and notable value manager John Rodgers at Ariel is also a substantial shareholder — those are some big names in the “fundamental value” camp, and they’ve both been shareholders for a while (Ariel’s stake shrunk recently, it appears, Weitz’s has been pretty flat). That doesn’t necessarily mean the stock will be a great investment, but if you back out the cash position it’s trading for about 12X last year’s free cash flow — not cheap, but perhaps a better valuation than you’d assume by looking at the trailing PE in the 40s and the forward PE of about 30.
So … do you think their investments will pay off? Spending on weddings is a bit correlated with the economy and did dip in 2008 and 2009 but has bounced back pretty nicely — and perhaps the Wall Streeters will eventually fixate on the fact that the average Manhattan wedding costs almost $90,000 (that’s about three times as much as the national average) and decide that XOXO is a great buy, who knows. For now, I think the niche marketing they can offer is very appealing, I’m intrigued with Weitz holding a substantial share and with the sharp drop from their highs in recent months, and I’m curious as to whether their strategic moves will pay off… but I’m not rushing off to call my broker just yet.
But it is, of course, your money — so your opinion is the one that matters. Share it with a comment below, and if you’ve ever tried out Brain Trust Profits you can review it for us here (the only other teaser pick of theirs that we’ve sussed out, their tease of HomeAway back in January, has not been a winner, but we don’t know what else they’ve been suggesting in the meantime). Thanks!