Most of the newsletter ads I see come pouring in through the email floodgates, but there are still a few publishers who invest in good ‘ol direct mail campaigns and send you actual letters in the mail — they realize, no dummies, that most of their potential customers are old enough that they might even occasionally write a letter, and they’re likely to get a lot more attention with a nice long letter in the mail than they will with an email.
So I thought I’d take a look at one of these today — I’m on enough physical mailing lists that I get a few of these a week, and several readers are kind enough to forward the print mailings on to my PO box as well, so if you see something delightful feel free to send it along. This one is from Richard Moroney, who edits the newsletter Upside, and while it’s clearly a little bit long in the tooth I did get this in the mail just a couple days ago, and he is also still teasing us about at least one of these stocks on his website as well … so either these are still favorites, or, the cynic speaks, the ad still works (or both).
Moroney has been around for quite a while, and the letter, with a name change or two, has been published for about 30 years (the publisher is also responsible for the venerable Dow Theory Forecasts, now more than 60 years old), so this is a well-established newsletter … which hasn’t helped much in the last couple years, according to Hulbert the portfolio has been beaten by the Wilshire 5000 over the last one, three and five year periods (though the beating has been worse than average this year).
Still, doesn’t mean he can’t have some interesting stock picks, right? Shall we see what they are?
By way of a quick introduction, Upside is a letter that focuses on both fundamental and quantitative/technical measures — he uses a stock screening system that he calls Quadrix, which sounds extremely similar to Louis Navellier’s momentum-hunting Portfolio Grader, designed to sniff out stocks with good earnings numbers and ratios and good momentum, and then uses fundamental and company analysis to choose his favorites from the stocks spit out by the system.
He seems to generally focus on smaller-cap stocks, going a bit into mid-caps as well, and on growth. So with that in mind, what’s he teasing?
“I’ll guarantee you can get back the money you lost … in spite of the double whammy of a market crash on top of a recession … if you follow my recommendations”
The guarantees run fast and easy in this business, of course (what do they have to lose? Most newsletters will cheerfully refund your money if you ask, but they will not, of course, make good on any investing mistakes they steered you toward), but still, it sounds nice when so many of us are looking at badly bruised portfolios.
And he pretty quickly jumps into his first tease …
“My #1 stock recommendation for 2009 …
“With Internet traffic surging, companies are increasingly relying on this technology company to improve the delivery of content and applications.
“The company optimizes Internet traffic by using thousands of specially equipped computers to detect and avoid network bottlenecks.
“While the outlook for technology spending has weakened, this company remains positioned for growth. Its solutions help clients boost revenue and reduce costs by improving online performance, reliability and security.”
So that might be enough — this narrows us down to a pretty small list of companies. But then we also get a few specific clues …
“Consensus estimates project per-share earnings will be up 1% in 2009 and 6% for 2010. But the company has exceeded expectations for three straight quarters — including an impressive showing for the March quarter — and consensus growth estimates seem unduly low given the company’s strong order rates, potential for market share gains and sturdy finances.
“I expect this stock to gain 30-50% before the end of 2010.”
So that means this must be …
Akamai is a stock that I also like a lot, though I don’t currently own it personally (I did profile it for the Irregulars a couple months ago, and certainly wish I’d bought it then myself, too). The clues are not definitive here, but of the most often considered “pure plays” on internet content distribution, which is the core of what Akamai does and what seems to be being teased, Akamai is the only one that beat expectations in the March quarter. They disappointed in the quarter after that, which may well have come after this ad was written, and then in this most recent quarter (the September quarter, earnings released last week), they beat expectations and impressed investors enough to send the shares up 10%.
The consensus currently is different from that 1% in 2009 and 6% in 2010, but that’s fairly close to what I saw predicted early this year, so I can believe he’s referring to Akamai there. Right now, analysts are essentially predicting flat earnings going forward — $1.61 per share this year, $1.62 next year, and roughly 10% growth for the next five years (the five-year projections always seem even more like a wild guess than do the current estimates). I personally agree that analysts are probably being too skeptical of Akamai’s future growth and giving too much weight to the challenges that they have faced and overcome for several years already.
If you don’t know the company or the business, but as primarily an operator of a Content Delivery Network (CDN), Akamai essentially acts as a combination of 7/11 and traffic cop for their customers on the internet. It’s a traffic cop in that they monitor congestion and direct traffic for their customers to try to avoid that congestion, and a 7/11 in that they bring much of the content of the internet into your local neighborhood, so you don’t have to go to Costco if you just want a gallon of milk. They do this by running a massive global network of servers, many of them placed in the ISP local nodes of the internet, the switching station that serves a local neighborhood, and place their customer’s key applications and content on those servers — that way, if a bunch of people want to watch the Victoria’s Secret Fashion Show all at once, their computer connects out to the network and the video file is right there a mile from their house, not across the country at a server in California that might blip in and out on you as your cross-country connection hits interference and congestion.
I won’t go into great detail on this, many of you have heard me talk about Akamai before, but it’s a very high-margin and strong recurring revenue business (their customers tend to be pretty sticky, since their customers get mad and go elsewhere if their web applications are unreliable). This is about as cheap as the stock gets in terms of valuation, with a forward PE at a discount to the market in the low teens, though that does assume that they’ll keep growing and fighting off their competitors. Their competitors are continuing to get stronger, though most of them are either small divisions of larger companies (like Amazon), or private, or mostly conceptual (ie, a faster internet in general lessens the requirements for Akamai’s service, or peer-to-peer content networks negate the need for Akamai’s edge-of-the-internet content hosting) — the closest competitors among public companies are probably Limelight Networks (LLNW) and Level 3 (LVLT).
Moroney threw out a couple more ideas in this letter, too — let’s see if we can match one more teaser to a stock tickers for you:
“Shocking profits from a retailer in this recession.
“it’s no wonder that even in this horrific market crash this retailier, mentioned in the 02/02/09 Hotline, has seen its price per share jump 77.9%.
“The reason being, unlike many of its retail rivals, this marketer resisted rapid expansion, preferring instead to limit debt and nurture sales from its existing base of apparel stores. A great move considering we’re now in a recession….”
Didn’t he hear the recession’s over? More indication that the letter’s getting a little aged, I suppose — or perhaps that he’s looking at the actual economy and ignoring the stimulus sugar high.
Some more clues about this one?
“It posted double-digit growth in same-store sales every month” in 2008.
And it “bucked retail’s worst holiday season in 40 years, delivering a 13.5% same-store sales gain for December.”
And a couple more little clues on the financials:
“Year-over-year net profit margin has climbed in 20 of the past 21 quarters. Over the past 4 quarters, net profit margin has averaged 13.2%, well above the average of 5% for specialty retailers. I expect this stock to gain 25% before the end of 2009.”
This is one that I’ve heard of from many different folks over the years, including a teaser from Zacks about a year and a half ago — The Buckle (BKE)
When Zacks wrote about them back in March of 2008, it was because the stock was in a “breakout” — and it has done extremely well since then, with a few peaks and valleys, but “extremely well” is actually “flat,” you can buy it now for about the same price you would have paid then, which qualifies as a huge outperformance when compared with most other specialy retailers.
The Buckle started out as a denim store and is essentially a “teens and twenties” apparel store now, not unlike the Aeropostales and Abercrombie & Fitch and American Eagle stores you’ve probably seen, though they apparently tend to help the more value conscious since they sell a range of brands (not just their own) and are perhaps a bit more flexible on prices. But still, in the end it’s all about fashion and a brand identity with your core customers … and about that I can tell you absolutely nothing, when I’m not wearing my sporty bowtie I tend to favor the uniform of distinctly non-premium jeans and t-shirts. Sometimes long-sleeved t-shirts, in a nod to what passes for winter here in Washington, DC.
The Buckle stock looks quite inexpensive right now on a trailing PE basis, thanks to the fact that their sales didn’t fall apart over the last year as many others’ did — it’s a lot cheaper than American Eagle or Abercrombie & Fitch, to be sure, and even cheaper than the goliath of the sector, The Gap. Probably the closest comparison is to Aeropostale, another teentailer that gets credit for doing well in the recession thanks to somewhat lower product pricing. On the other hand, BKE does compare very favorably with ANF in the area that always made Abercrombie stand out: Margins. Looking at recent margins, ANF still posts the blockbuster gross margins, around 65%, but BKE is pretty close at nearly 50% (most of the others, the Gap, J Crew, American Eagle, etc. are in the high-30s). And when it comes to actual operating margins, which account for those non-product-specific costs, the Buckle creams everyone with operating margins of over 20% (most of the others, including Abercrombie, are in the single digits). So they’ve come by their excellent stock performance (for a retailer) honestly.
I can’t say that I’d be eager to buy any specialty retailers at this point, given my unease about the mall economy, but if I were going to buy one it would be a cheap one that can make a profit in this kind of economy, like the Buckle or Aeropostale, not one that depends on a nice economic recovery to survive, as appears to be the case with some of the others. It’s still all about getting the fashion right and appealing to a fickle audience, which is why I never feel like I understand who the winners will be or why, but based on the financials compared to their competitors, it’s pretty hard to argue against BKE.
So what do you think? Both The Buckle and Akamai have certainly been “flavor of the month” stocks on more than one occasion, though BKE has certainly been more popular lately. If you like or loathe either, or have other ideas you’d like to share, feel free to let us know with a comment below.
And if you’ve ever subscribed to Moroney’s Upside, please let us know what you thought by clicking here to submit a review — we haven’t had any reviews of this one yet, but I imagine we’ve got at least a few subscribers to his service out there in the vast reaches of Gumshoeland. Thanks!