Lots of readers have asked about the latest “almost perfect stock” pitch from Louis Navellier for his Blue Chip Growth newsletter (currently $100 a year), so that’s the Thinkolator’s project for today: What is it?

Here’s the tantalizing lead-in:

“Imagine… a technology company whose product you don’t install, that reduces business costs by billions a year, and that end users can access with the click of the mouse.

“…a company whose revenues rose 8% and whose earnings mushroomed 13% last quarter—ALL while handing investors 77% 12-month gains.

“So what, exactly, is the flaw here?

“99 out of 100 investors have never heard of it and yet it’s transforming the computing world just as Microsoft
and Intel did before it.

“Here’s the full story why it’s set to double investors’ money in 2017.”

I’ve written about a lot of Louis Navellier teaser pitches over the years, and I think he probably used that “99 out of 100 investors have never heard of it” line in pretty much every one of them. And, of course, he’s also been pretty free with the “Almost Perfect Stock” moniker, though we’ll check and see if this is a stock he has given that title in the past.

And there’s almost always a pretty specific promise in his ads — not just the “double money in 2017” but also the guarantee of good returns within just six months — this is what the order form for his Blue Chip Growth says now:

“If My Almost Perfect Stock Doesn’t Hand You at Least 25% Gains by October—You Won’t Pay a Dime”

It’s a wonderful thing, this online newsletter world — in some ways, it’s almost the perfect business if you’re a big publisher: There are almost no costs for servicing each new subscriber, so they risk almost nothing in guaranteeing you your money back if you’re dissatisfied, whether you couch that as a “trial period” or a guaranteed gain by a certain date. The risk is very much skewed — you risk your capital on the investment ideas that they propose, perhaps emboldened by a promise that some particular gain is coming (like, say, 25% by October), and the newsletter seller risks only the money that you’ve already paid to them, money that wasn’t theirs to begin with anyway.

In some ways, it’s seems that they rely on you believing that the newsletter editor risks his “reputation” in making these bold promises, so wouldn’t promise unless he was really, really sure. That, unfortunately, is not a belief that is backed by much evidence that I’ve seen — those promises are almost certainly made by the publishers and advertising copywriters because they work to get your attention, not because the newsletter editor is “staking his reputation on it” in any real way. Those of us who aren’t in advertising overstate the value that newsletter pundits place on their reputation versus the value of cold, hard cash that they can scoop into their pockets… or, perhaps, we forget that in many cases newsletter pundits are employees or writers, disconnected from the marketing process even if their signature is at the bottom of the ad. They don’t always choose how to market their ideas. I don’t know about Louis Navellier, who has been around for longer than most and presumably has pretty complete control over his little fiefdom within InvestorPlace, but I hear from newsletter editors with some frequency who are aghast at the promises made in their name (or, in some cases, don’t even recognize the stock recommendation they’ve made once an ad copywriter has given it the hyped-up teaser treatment).

But anyway, I note those reminders just to put a little halter on your horse as you gallop toward this “almost perfect stock.” Maybe it’s great, maybe not, but it’s your money at stake — not Louis Navellier’s. Make sure you think it through.

So what is our “secret” stock this time out? We get a few more clues:

“Grab It Now Before It Takes Off Again

“You’ll never get it at a better time or at a cheaper price.

* Sales of new software licenses, seen as a measure of future growth, jumped by 7.5 % year-over-year to $887 million while service revenue climbed at a slightly higher rate to $1.15 billion.
* What’s more, the company recently announced that it would buy back up to $1.2 billion in shares—which will further push up its share prices.
* This is why Dodge & Cox, Cisco Systems, Clear Bridge Investments and other institutional investors are gobbling up millions of shares.”

And we even get a few clues that we can use to verify the Thinkolator’s answer — like the fact that Dodge & Cox holds 9.4 million shares, and Cisco holds 4.3 million.

So who is it? Thinkolator sez this is: VMWare (VMW)

Which means that we can, at the very least, reward Louis Navellier for his consistency — he also called this the “Almost Perfect Stock” back in March of 2012 and, before that, way back in August of 2010. (In case you’re wondering, buying on those dates would not have been particularly profitable — buying in March of 2012 was very near the peak and the stock is down about 7% from then (the S&P 500 is up about 90%), buying in August of 2010 would have looked a little bit better, the stock is now up 15% since then and peaked at gains of over 30% from that point, but it’s still horribly lagged the market (which is currently up about 140% over those almost-seven years).

Buying VMWare more recently would have worked out much better than those earlier purchases, the stock has roughly doubled since its lows in February of 2016 — but that’s mostly because the shares collapsed by about 50% in the second half of 2015. So what happened then to drive down the price, what’s causing this resurgence over the past year and a half, and where is VMWare headed from here?

Well, I don’t know if Navellier’s right or not about his “double in 2017” or his “up 25% by October” promises, but VMWare is trading at pretty historically low valuations right now. The stock has a forward PE ratio of just under 20 for 2018, and is expected to grow earnings by roughly 10% a year over the next few years — and the trailing PE ratio is in the low 30s, which is much lower than the valuation VMW carried for most of the past decade.

Of course, there’s a reason for that relatively reasonable-sounding valuation: Growth has been nowhere near as fantastic as analysts had expected it to be five or ten years ago, way back when VMWare was really still just about “server virtualization” and creating a software platform for data centers and the notion of “Cloud Computing” was still a hot idea in its infancy, before “the cloud” and “computing as a service” became a somewhat commoditized business dominated by Amazon, Google and Microsoft. VMWare is still a dominant company in some aspects of cloud computing and server virtualization, which goes by lots of different names now, but expectations have gotten a bit more reasonable and the stock, which used to be crazily overvalued, has gotten down to the realm of the “kinda normal.”

The fall in the shares in 2015 and 2016 was likely a result of not just that slowing growth rate, which hit the stock in fits and starts as they disappointed or decreased guidance over a couple quarters, but of the fact that VMWare’s parent was acquired and VMWare’s future was (and is) very much tied to its controlling parent. That parent used to be the storage giant EMC, which owned 80% of VMWare, but Dell announced plans to acquire EMC in a leveraged buyout back in 2015 and completed that deal in the Fall of 2016, and that added a huge dose of uncertainty to what was already a stock with reduced growth expectations.

So the recovery in the past six months or so seems largely to be based on “Dell didn’t do anything damaging yet” (like liquidate its VMW shares, or go bankrupt under that huge load of debt), but there is still a substantial risk in buying shares of a company that has a heavily leveraged parent.

There’s also, however, an unusual opportunity in the market for arbitrage, as long as you don’t think Dell is going to go bankrupt. That’s because Dell also, as part of its takeover of EMC, spun out a large portion of its VMWare shares as a tracking stock, and that tracking stock trades at a huge discount to VMW shares.

There’s an article about that opportunity in Barron’s here from last August, and the discount still persists — so it may well not close anytime soon (and if Dell is in trouble at some point it could widen, since the tracking stock is not direct exposure to VMWare, it’s a Dell obligation that promises to track VMWare shares). Still, it’s kind of interesting if you’re otherwise inclined to look at VMW — the tracking stock is actually significantly larger (since it represents something like 50% of VMWare, while VMW represents only 20% of the company), and typically more liquid in trading. The tracking stock used to be called “Dell Class V” but is now called Dell-VMWare Tracking Stock (ticker DVMT), and it trades at about a 30% discount to the VMWare (VMW) share price (the discount was steeper at about 40% when Barron’s published that note in August, back before the actual deal closed, but 30% is still huge).

Dell itself is not public anymore, as you probably remember (Michael Dell took it private in a leveraged buyout back in 2013), but the tens of billions of dollars of Dell bonds do give some indication of what the market thinks of the company’s prospects — and on that front, there’s relatively little obvious worry. It’s still a junk borrower, with a below-investment-grade rating, but the rating has been improving (Moody’s bumped them up to Ba1 last year, which is their highest “non investment-grade” rating), and the acquisition of EMC generally improved their creditworthiness despite the huge bond issuance that made that acquisition possible (probably mostly because EMC was a much healthier operation than the core Dell hardware business, though the fact that the desktop computer business has stopped collapsing also helps). Dell’s current short-term bonds that mature in about four years, for example, currently trade at a yield of 3.6%, which means there’s very little short-term concern on the part of bond investors (and even their 2040 maturities trade at only a 6.3% yield, which isn’t a huge risk premium).

So on that front, if Dell isn’t in obvious trouble, perhaps the discounted tracking stock is more appealing. And there is some “there” there with VMWare in general, despite their disappointing slowdown over the past decade — and it’s a “slower growth” problem they’re living with, not an actual decline in revenue or profits (or at least, analysts don’t expect an actual decline). VMWare continues to have a strong lead in the core server virtualization business, and some interesting growth possibilities in cloud computing (including their partnership with Amazon Web Services, which will kick off later this year) and network management software that they seem excited about… and if you’re interested in taking the additional risk inherent in a tracking stock, there are several possible ways for that DVMT/VMW discount to narrow over the next few years. If it narrowed to something in the more “normal” 10-20% range for a tracking stock instead of the current 30%, that could provide for some growth in DVMT’s stock price even if VMW treads water for a while (if VMW stays where it is around $94, for example, and the discount narrows to 15%, DVMT would hit about $80 for a gain of about 20%).

I don’t know whether Navellier is recommending the actual company shares (VMW) or the discounted tracking stock (DVMT), but I’d probably be more interested in the latter. Not so interested that I’m rushing out to buy shares at the moment, but I was at least curious enough to start reading up on them — if I ever do buy shares, of course, I’ll let you know.

That’s just my quick thought after some browsing in the financials, though, and it’s your money at stake — so what matters is what you think. Interested in VMWare or the tracking stock? Let us know with a comment below.

P.S. We’re also beginning to collect subscriber reviews of newsletters again, so if you’ve had any experience with Navellier’s Blue Chip Growth please click here to let your fellow investors know what you thought. Thank you!