We first ran the following teaser solution on September 23, around when we first saw this ad about big data from Leeb’s Real World Investing — at the time, it was his “favorite pick for the rest of 2014”, and the stock did well, up 25% or so thanks to a big jump in late October into an earnings “beat.” More recently they’ve pre-announced that some of the 2014 contracts are falling into 2015, which didn’t impact the stock much… official earnings release won’t come for another two weeks or so.

Other than that brief update, what follows below has not been edited or revised since it first ran (the language we cited below is still in the ad, which is also essentially unchanged other than the “2015” chatter. Enjoy!

–from 9/23/14–

Dr. Stephen Leeb is teasing us about a “quantum leap” company in high performance computing — he says it’s his “favorite stock for the rest of 2014” and that it is becoming a major force in the hot “big data” space as well.

So what is “The Breakthrough High Performance Computing Company Being Kept ‘Top-Secret’ from Investors?” Well, if you want Leeb’s report he’ll ask you to first subscribe to Leeb’s Real World Investing, which will currently run you $499 a year (I used to consider this a “hard assets” newsletter, but perhaps that was a few years ago, back when hard assets were popular). I’m sure he’ll give you plenty of other stuff that for that money, bit if it’s just the name and some quick info on this teased stock you’d like, well, read on — an answer is on the way.

We’ve written about Leeb’s letters many times over the years, incidentally, but not a lot in the last few months — the last teaser pitch we unveiled for you from Real World Investing was about the drone-related conglomerate Ametek (AME), which he said would generate 20% earnings growth for years into the future — so far it’s been pretty much flat since we looked at the tease in February, for whatever that’s worth.

Here’s how Leeb describes today’s secret stock:

“… my guess is you’ve either never heard of this company — or you’ve never given it a second thought.

“That’s for good reason:

“Because this company is also one of the most secretive firms I’ve ever come across….

“In the past, this company’s clients were almost exclusively government, aerospace or automotive firms.

“But times have changed.

“Now everyone wants a piece of their technology…

“Plus ….the company’s primary market — the High Performance Computing market — is exploding.”

OK, so that’s interesting — can’t say that I’ve thought much about “high performance computing” in recent years, but I guess all those supercomputers are still out there trying to win on Jeopardy and model the weather (and the stock market, probably). So which one is Leeb teasing?

Here’s some more:

“… my top secret pick has also tapped into a new market in high performance computing.

“You see, they’ve “shrunk” their $10-$30 million supercomputer into a ‘mini’ model that sells for a half-million dollars. Yes, that’s still a lot of greenbacks.

“But US companies are lining up to own this ‘quantum leap’ computer at an ‘affordable’ price. And, this ‘junior’ model uses the same software and processors as the multi-million dollar technology.”

I do remember, way back when I was an undergraduate, that my University was raising money to build an entire building to house a new supercomputer — so I guess it’s a good thing they’ve scaled down, like every other part of technology. How about some more clues about our “secret” company?

“This firm was founded in the early 1970s… and its very first product sold for $8.8 million….

“… this company has little in the way of competition.

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“And this company continues to make new, big-ticket sales in the High Performance Computer market that fly under the radar….

“In late April, the company announced a new, $70 million computer contract with the U.S. Department of Energy…and that was on the heels of a multi-million dollar contract to bring the first supercomputer of its kind to Hong Kong.

“Even more recently — in May — the company announced that its second supercomputer was being put into place at a prestigious Japanese university.

“This constant flow of new, multimillion-dollar contracts — resulting in growing revenues — show that this company is still the dominant player in the High Performance Computer market….

“A Bold Step Forward into Big Data with a ‘Secret Weapon’ While this company has enjoyed both growth and success in the HPC market…its most recent entry into the Big Data market that provides the real profit opportunity.

“The Big Data market — by most estimations — is projected to grow at a rate of about 40 percent per year…or six times faster than the growth rate of the overall IT market.

“And this company is pouncing on the opportunity, projecting that their own growth in Big Data will be double that of the overall market.”

So that ought to be enough, right? Just a couple more tidbits in case you’re wavering:

“Last year the company sold a record number of its “signature” products…

“It’s a rapidly growing company — they’ve added roughly 100 new employees per year in recent years…

“The company’s on a tear. Fourth quarter sales in 2013 clocked in at a 63% increase over the same quarter, previous year, and surpassed analyst estimates….”

So who is it? Thinkolator sez that Leeb is teasing Cray (CRAY), which is best-known for their Cray Supercomputer line of customized, gigantic thinking machines that started with the Cray-1 built by Seymour Cray almost 40 years ago (the original supercomputer he designed cost $5 million+ and they sold fewer than 100 of them… and it was less powerful than an iPad is today, another reminder that severe price deflation is very real in many industries).

If you’ve never heard of Cray, or haven’t thought of them in years, the Seattle Times had a good overview piece about them last year that’s worth perusing. They are indeed trying to position themselves at what they call the “confluence” of supercomputing and big data — which makes sense, I suppose, the more “big data” grows and the more data that’s collected, the more supercomputing power you’re going to need to make sense of it all. Their newer products look more modular and scalable than the supercomputers of old, and I guess they’ve been quietly doing pretty well over the last five years, but this is still a very small company (market cap under $1 billion) in a pretty specialized little corner of the computing market.

If CRAY is able to become a ubiquitous processor of “big data” with their supercomputers, then there’s every chance that they could do very well here — they are a real “pure play” on high performance computing, and that’s fairly hard to come by… but the flip side is that their competitors are behemoths like IBM, probably their most direct competitor, which could buy all of CRAY with just about one month of its free cash flow.

The story is somewhat appealing, but it’s also an extremely lumpy business — the second quarter was pretty much flat with their year-ago numbers, which sounds a lot less spectacular than the quarter Leeb highlighted (their fourth quarter last year, which was their best quarter — in revenue terms — for at least ten years). They’ve been very seasonal in recent years, with the fourth quarter being when most of their revenue and all of their profit hits the income statement.

Lumpy businesses can be great for patient investors, particularly if they’re fairly small and investors overreact to quarterly reports about units sold or backlog or the like, but that assumes the company is genuinely in a real business uptrend and likely to do well over time. If that’s the case, then the wild gyrations caused by each quarter’s update can provide substantial buying opportunities — the stock peaked back in March at about $40 when people were still excited about that fantastic fourth quarter 2013 report, and has come down with most subsequent reports — the shares got close to $30 in anticipation of the last quarter, then fell back to $25 or so when the report came out (that’s where the shares are now).

The company is not being particularly aggressive about their forward guidance, it appears, but they are reiterating that the fourth quarter should be their big quarter this year. They won’t report their third quarter until early November sometime, so there’s the possibility for some lumpy times before we hear more about how that fourth quarter is going or have an opportunity to see that guidance change at all.

This is what they said in that last quarterly report, when the language about the business’ growth was generally very positive:

“For 2014, while a wide range of results remains possible, the Company anticipates revenue to be in the range of $600 million for the year and, as previously indicated, to be heavily weighted to the fourth quarter as has been typical in recent years. Revenue is expected to be about $125 million for the third quarter. Non-GAAP gross margin for 2014 is anticipated to be in the mid-30% range. Total non-GAAP operating expenses for the year are anticipated to be about $175 million. Based on this outlook, the Company expects to be profitable on both a GAAP and non-GAAP basis for 2014.

“The Company’s 2014 effective non-GAAP tax rate is expected to be about 10%.

“Actual results for any future period are subject to large fluctuations given the nature of Cray’s business.”

That would be roughly 15% revenue growth over last year, and that the third and fourth quarters would both have substantial year over year sales growth. And the other numbers (gross margin around 35%ish, operating expenses) are pretty consistent with last year and that growth number, so they ought to be able to grow earnings. Analysts don’t really expect them to grow earnings this year, with an estimate that the earnings per share will be about 78 cents for 2014 (it was 76 cents in 2013), so perhaps there’s some room for Cray to “surprise” on the upside when the numbers come out… but it really ALL depends on the fourth quarter (roughly speaking, they’ll lose 70 cents a share in the first three quarters then make up for it by earning $1.40 in the fourth quarter), so we won’t know until about Valentine’s Day, 2015 if it’s a sweetheart year or not.

And given that, the company is not particularly cheap — they have a great balance sheet, with more than $100 million in cash, but analyst projections for 2015 mean the stock is trading for about 24X next year’s earnings (the actual trailing PE is 38). There’s a fairly substantial short interest at about 10%, but it’s not really been targeted by bears recently.

I’m a little intrigued by the story, largely because of the potential in big data for newer and better supercomputer applications, but I’m in no hurry to jump right into CRAY — I’ll probably research the company a bit more in the months to come and see if I get more comfortable with it, but I’m also a little bit nonplussed by the recent wave of insider selling. Insider selling doesn’t always mean anything dramatic, you never know when the CFO wants to buy a boat or something, but when a stock has a big wave of selling from multiple insiders that catches my eye — almost 20% of insiders shares were sold over the summer, most of them by officers who ought to have a pretty good idea of how the business is doing day-to-day. Maybe digging further will provide a good reason (like they all held for many bad years, or some of them are leaving the company, or whatever), but it’s not a good indicator.

So… are you ready to get on board with Leeb’s pick of Cray? Think they’ll be the next big thing in “big data” with their giant thinkolating machines? Will that create some actual profits for shareholders? Let us know with a comment below.