Here’s how Louis Navellier pitches his next uber-hot idea for a stock that gives you three phone numbers on one phone and 10-bagger profits:
“Last May I told you about a new wireless juggernaut whose 3-in-one proprietary technology and earnings growth matched Envirodyne, which handed us a monster 1,700% gain a few years back.
“Since then, this company has not only handed my readers 205% profits on 2,999% earnings growth but is now on track to break out again come February 28.
“If you missed the first wave of profits, you’re getting a valuable second chance to grab the next 205% gain before it declares earnings again—but only if you act now.”
Navellier is teasing this idea in order to get you to subscribe to his Emerging Growth newsletter, which generally looks at smaller stocks (and costs more — it’ll run you almost $1,000 even on the “family plan discount”). He also says that he’s been “beating the market by $3-to-$1 since 1985” — I don’t know if that’s true, but I have my doubts if their claim means what it seems to mean, which is that Emerging Growth’s portfolio has returned 3X more money over 25 years than has the broader market.
Hulbert, which tracks actual portfolios of newsletters, lists the annual return of this newsletter since 1985 and there are only a few years in which the performance has doubled the market’s returns, and a couple in which it has done substantially better than that — with the very best years being mostly in the late 1980s and early 1990s. Hulbert’s data says that over the past 15 years Emerging Growth has trailed the market (roughly 6% annualized returns versus 7% for the broad market). I don’t cite this data just to poke Navellier, I would do this with everyone if I could but most of the more heavily hyped newsletters are not tracked by Hulbert (or, as far as I know, by anyone else who actually monitors the specific portfolio performance). So Navellier gets some extra scrutiny since there’s an observer who’s been tracking him for 25 years.
But anyway, whether he’s beaten the market or not over time he certainly comes up with high-growth stocks for our consideration, and his picks often outperform, particularly in a bull market. So let’s find out which stock he’s touting today, shall we?
He again makes a promise, as he always seems to in his high-pitched teaseriffic emails, that it the stock doesn’t jump another 50% shortly after it releases earnings (which are coming out in about a month, on February 28), then “you won’t pay a dime” (meaning, you can get a refund for your subscription — not that they’ll make good if it turns out the CEO of this teased firm stole the company’s checkbook and is hiding out in the Cayman Islands … so in practice quite similar to the refund guarantees of most big newsletter publishers, though thankfully without the “10% refund fee” that many have imposed recently).
So it’s some kind of tech stock that’s releasing earnings on February 28, which is a lovely hint, and Navellier tells us that it must be a chip company of some kind, because their technology allows for cell phones to carry three different phone numbers … here’s how he describes that:
“Unlike the cell phone in your pocket that limits you to one carrier and one number, this company’s chips will allow YOU three phone numbers from three potentially different carriers.
“The result will allow you to quickly change phone carriers to grab cheaper call prices and better network coverage when you’re on the move—all while retaining your contacts and without your having to buy a new cell phone!
“Talk about a dream come true!
“This is why this company’s chips are selling like hotcakes all over the world and particularly in China where this 3-in-1 feature is hugely popular.”
So … that’s two hints. Do we learn any more about them?
I’m so glad you asked! Indeed:
“the company’s earnings jumped 2,999% last quarter…. the stock’s price jumped 205% profits in eight months… “
And we also get a bit of a hint about the stock price — he says that this is a “$19 wireless juggernaut” and, naturally, that since he thinks it “could have already hit $27” if you wait to buy after earnings, and after Navellier’s “buy rating becomes public.”
So that ought to be enough, right? We’ll try it out and see — let me just feed all that data into the mighty, mighty Thinkolator and yes, we learn that this stock is:
Spreadtrum Communications (SPRD)
No, I hadn’t ever heard of them before, either.
This is a Chinese company, a decent size (market cap just under a billion dollars) fabless semiconductor shop (“fabless” just means they don’t have a factory of their own, they just design and sell the chips and outsource fabrication to one of the big foundries).
And yes, they have designed a product that could allow a phone to use any of three different SIM cards, which would mean that you could shuttle back and forth between carriers or, for jetsetters, have a SIM in the phone for each country you work or live in. This innovation was announced last Fall, here’s the press release, and Spreadtrum was also, according the themselves, the company that came out with the dual-SIM chip. They also develop 3G dual band chips to enable phones to run on both CDMA and GSM.
Despite my not having heard of them before, they have been public for several years and have seen remarkable stock performance for the last two years (don’t ask about the two years before that) — the stock is up from about a dollar to the current $19ish since the lows in January of 2009. As with many Louis Navellier picks, it’s tickling all-time highs.
And yes, they did report absolutely ridiculous earnings growth last quarter, though the analysts don’t seem to think that will continue. Revenue growth was 150% year over year, and earnings were up 2,999.5% (I would have rounded up to 3,000% myself, but that’s just me). Analysts think they’ll earn more than 50 cents per share in the fourth quarter (that’s what gets reported on February 28), which would indeed be another quarter of massive year over year growth (a year ago the earnings number was three cents).
As the quarters go by, of course, the growth numbers are expected to be far less dramatic — they’ll still grow, and very nicely if the analysts are right, but they’re not going to bump up earnings by several thousand percent again. The estimate — and there are a half dozen analysts covering this one, so their estimates have generally been reasonably close on average — is for $1.63 in earnings for 2011 for a forward PE of about 11 (which represents about 30% growth over 2010), so that’s a reasonable valuation if you expect the growth to continue at any kind of double-digit rate over the next several years. It’s also quite clear why Navellier likes this one: not only has the stock developed crazy momentum over the past year, which triggers some of his indicators, but it also is seeing analysts raising estimates in recent months, another good trigger (though the stock hasn’t provided much by way of earnings “surprises,” which tend to be the what shocks a stock upward at earnings season).
As to the fundamentals of the company? Well, I can’t tell you anything about the uniqueness or lack thereof of their products, I suspect that the tri-SIM GSM in developed markets will remain a niche product for global travelers, if only because most Americans don’t even know that there’s a SIM inside their iPhone, but that’s just my opinion (and not an expert one) — it may be the next great thing and I can certainly see how it could be popular in Asia and Africa, particularly. In fact, though I assume that this particular chip offers some new development, triple-SIM phones have been available in China for at least three years. Navellier says in the tease that this is one of three chipmakers who can provide the basic communication chips for these “three phone number” handsets, I can’t verify that but if so, that may be enough competition to keep prices down — particularly in such a fast-moving market.
I can tell you that the stock has had some huge swings, not particularly unusual for small semiconductor companies — over the last eight years or so about half of the years were profitable and half unprofitable, with margins all over the map, so I assume that’s largely product cycle stuff related to getting their designs into new phones. 2008 and 2009 were pretty tepid with steady revenue and margins, but 2010 really perked up with more than doubled revenue and a return to operating margins in the mid-40% range, a place they hadn’t seen since 2006… so the key, I suppose, is whether their designs and uptake from customers is strong enough (and their competitive position solid enough) to let them keep the revenue numbers up at these levels and maintain margins.
And since that’s the key, of course, I have no idea which way it turns — so I’ll toss it out to the great Gumshoe Faithful, many of whom know their way around a semiconductor foundry. Maybe someone can tell us if this tri-SIM chip is really a big deal, or whether we should trust that the rapid ascent of SPRD will continue. Feel free to share any thoughts along those lines with a comment below — that’s why we’ve got such a friendly little comment box, it ain’t just there for looks.
We’d also like to know, naturally, whether Navellier’s Emerging Growth subscribers feel like he’s beating the market $3-to-$1 for them — so if you’ve ever subscribed, just click here to submit a quick review over at Stock Gumshoe Reviews and share your experience. Thanks!