Louis Navellier is at it again, telling us that he’s found another hot momentum stock …
“Grab it Now Before it Delivers another 400% Earnings Growth”
But today’s note from your friendly neighborhood Stock Gumshoe is as much a cautionary tale as it is a deciphering of a Navellier teaser — I’ll tell you the name of this stock, sure, but I’ve also told it to you before, because Louis has teased it before.
Unfortunately, the last time Navellier teased this stock he called it a “$4 Doubler” that would “hit $8 with or without you.” So the fact that it’s now a $3 stock that will hit $6 is, perhaps, a little disappointing.
The pitch Navellier uses this time is also almost exactly the same — he talks about how he’s only about making money, he’s not “politically correct.”
“I’m Louis Navellier, and if you know anything at all about me, then you know this: I don’t invest in a stock based on any kind of ‘political correctness.’
“I ONLY invest in stocks that are:
“1. Riding the trends and,
“2. Making money and making my readers rich.
“To be sure, I hold a number of GREAT alternative energy companies that are making money hand over fist.
“But I don’t own them because of their ‘greenness!’ I own them because of their greenbacks!
“If you’re a politically incorrect greenback investor, as I am, then you’re going to love my fast- rising $3 Tea-Party stock.
“The reasons are simple: It’s on the verge of another blow-out quarter, shaking up the politically correct establishment and doubling investors money along the way.”
Navellier also says that some very unpopular politicians (I guess they’re pretty much all unpopular right now, technically) “bristle” at this company’s success … as if we’re foolish enough to say, “Hey, I hate them too, let me subscribe to your newsletter!”
And he tells us, like he did last time, that it’s “on the verge” of another blowout quarter:
“If My Politically Incorrect Doubler Doesn’t Jump at Least 50% After It Declares Earnings—You Won’t Pay a Dime
“That’s how confident I am that this one has winner written all over it.
“If I’m right, you could easily find yourself 50% richer in the blink of an eye. If I’m wrong, simply get your money back.
“The best part: You have 60 days to watch it double before you make your ultimate decision.”
(An aside, this company probably won’t release earnings until the second week of March, if they keep to their pattern — which is, conveniently enough, a hair past that 60-day guarantee … so this serves as a reminder that they probably just copied this text verbatim from the last time they used the teaser, when that 60 days would have encompassed the last earnings date).
Just to square the circle here, I’ll include the clues he noted in this ad:
“The company has …
- Registered 447% earnings growth last quarter
- A forward P/E ratio of—get this—just 8
- A market cap of under $262 million
- Handed investors 90% gains year to date
- One of the strongest buy ratings of any of our stocks, and
- Is about to clobber Wall Street and double investors’ money again.”
But yes, this is, again, Smith and Wesson (SWHC — free trend analysis here … hint: it ain’t pretty right now) — and it looks like the marketers and Louis himself might not actually be on the same page, this was a top-rated stock in Navellier’s proprietary system a few weeks ago, having jumped up to an “A” for most of the Fall, but two weeks ago it bumped back down to a “B” rating.
Why, do you reckon? Largely because SWHC’s grade for “analyst estimate revisions” is now an F … which, in turn, is because when they released earnings a few weeks ago they backpedaled on expecations for next year, and analysts have been slashing their estimates. They had been expecting SWHC to earn 24 cents per share over the next two quarters, and that number is now … 10 cents. So that’s a rough haircut, would definitely want to wear a hat to school the next day.
The story for Smith & Wesson Holding Corp is roughly the same as it was when I wrote about them in early November for Navellier’s almost identical teaser — they have had a year of spectacular earnings growth, that 447% earnings growth number was real, as was the 60% beat of analyst estimates (both were for the July quarter, not this most recent October quarter that reported on December 3), but that growth was from depressed levels, and most analysts see them falling back again pretty quick since the company issued very soft sales guidance.
So I told you that this is a cautionary tale, in some ways — by which I mean that many of us, especially those of us who are new to investing, see a boldface name like Louis Navellier touting a stock breathlessly in this way, and we think it must be spectacular and well-timed … and, at least, an idea direct from the man himself. This further reiterates, since Navellier’s own system downgraded the stock a couple weeks ago, that many (if not most) of the teaser ads, and the timing for sending them, is based solely on marketing success, not on the actual stock beneath the teaser.
That’s not to say that we can’t find gems in here sometimes, or that the original idea wasn’t inspired by an actual investment analysis, but this smacks of marketing gimcrackery. Clearly, the folks at Investorplace Media, who publish Navellier’s stuff, know that being a bit “edgy” and claiming political incorrectness (as they’ve done when gun stocks hit their momentum screens before, as with Sturm Ruger over the Summer) works to appeal to their core demographic (60 year old well-off men who are grouchy about taxes), so they even throw in that very tangentially relevant “tea party” bit to help tap into the popular angst about government spending.
And are they embarrassed that a stock they predicted would boom after earnings and double from $4 is now being promoted as a double from $3? Not too likely, not as long as the subscriptions keep rolling in… and heck, this latest “double” is even a cheap one, the stock has only really barely dipped a toe into the $3’s, at $3.95 as I type this (down from close to $5.80 that it hit in pre-earnings enthusiasm before the weak forecast), so getting to six dollars would only be about a 55% jump from here.
SWHC may do fine, of course, and it’s always worth being skeptical of analysts — but in this case, when lots of analysts are downgrading a stock and slashing estimates, it’s hard not to listen to them. We might also note that analysts are pretty optimistic in the very long term — so as long as we’re talking about completely made up numbers, like the guess for growth over the next five years (18.3% according to analyst averages), SWHC sounds pretty cheap. After all, who wouldn’t be willing to pay a trailing PE of 6 for a stock that’s supposed to grow 18% a year? It’s when we get to the numbers that analysts might have a much better chance of estimating correctly, the earnings and revenue over the next quarter or two, that things look ugly — estimates now say we’ll get an 80% cut in earnings this quarter, and a 36% cut next quarter.
So what do you think? If SWHC goes back to making 10 cents a year, maybe not such a hot stock at $4 (sorry, $3.95)… but if it can make 40 or 50 cents a year, that ain’t so bad … have any confidence in those earnings numbers? Think Smith & Wesson is lowballing analysts, or are they really going to hit a sales slump as predicted? Let us know with a comment below.