This is not the first time a teaser stock idea has been pitched to us as “perfect” or “almost perfect,” of course, but using such definitive terms always catches my attention.
(Yet another weakness of your friendly neighborhood Gumshoe, I can’t resist the pursuit of perfection.)
And as he’s done several times before, this time it’s Navellier pitching a “perfect” stock as he tries to get you to subscribe to his Blue Chip Growth newsletter …
… so what makes it “perfect?”
“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 jumped 27% and whose earnings soared 59% over last year—ALL while handing investors nearly 20% gains since January.
“That’s double the performance of the S&P 500—all from this remarkable blue chip stock.
“Yet 99 out of 100 investors have never heard of it and it’s transforming the computing world just as Microsoft and Intel did before it.
“Here’s the full story why I’m issuing a buy for this stock at today’s prices.”
Well, dammit, that’s actually sounding extremely familiar — I think he might have used just this same language a couple years ago. Let’s sniff out a few more of the details to see if he’s still pitching the same stock as “perfect.”
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“The biggest flaw our research has uncovered with this software company is that few people know it or have heard of it—yet millions of users are using this application every single time they log on to the Internet.
“How can this be?
“Because this company’s breakthrough technology works behind the scenes on the Internet. As a result, end users like you and me don’t need to buy or install it.
“We use it ‘on the go’ with a few clicks of a mouse, no differently from using Yahoo mail, Google mail, YouTube, Facebook, Paypal, eBay and the like.
“The multibillion-dollar businesses that are employing this company’s technology are making out like bandits by not only reducing their customers’ software and hardware costs but also by delivering better service as well.
“That’s why nearly all major corporations are using this technology including…
- 100% of the Fortune 100
- 98% of the Fortune (that’s 491 out of 500)
- 96% of the Fortune (that’s 995 out of 1000)”
And there are a few more clues and enticements that we can lift from Navellier’s teaser:
“This One Stock Could Make You 50% Richer If You Buy At Today’s Prices
“Please add it to your holdings now.
“The global slowdown has forced all companies to get lean and mean—trading workers for technology—and cloud computing offers one of the best ways a company can cut costs and improve productivity.
“In fact, according to Information Week, spending on cloud computing will absorb 40% of corporate IT budgets, jumping to 70% in the next three years.
“The market research firm IDC concurs that spending on cloud computing—which was $16.5 billion in 2009—will increase 27% annually for the next four years—that’s four times greater than the overall technology market. As the market leader, our top-rated company will grab the lion’s share of profits.
“This is why the company’s 27% sales growth and 59% earnings growth are just a sneak preview of what’s headed your way.”
So yes, I’m sorry to say that it takes but a few moments in the pressure chamber of the mighty, mighty Thinkolator to confirm for you that the stock Navellier is calling “almost perfect” today in his new ad campaign is … the same stock he called “almost perfect” with a very similar teaser pitch back in August of 2010 … VMWare (VMW)
Since the stock was called “almost perfect” back then, it has gained about 25% … that’s very close to the performance of the S&P 500 over that time, though it certainly hasn’t tracked the S&P perfectly. VMWare is the leading light of the server virtualization business, helping to make server farms more efficient by running several virtual machines on a single physical server. They’re not the only ones in this business anymore, but they do still apparently have a large chunk of the market.
VMWare has been a Navellier favorite for a couple years because it’s just the kind of stock his system flocks to: large cap, earnings growth, earnings momentum, beating analyst numbers, and with a rising share price (that simplifies his system, but those are the kinds of things that he looks for). It’s also, not surprising for what has often been a momentum growth stock, quite expensive — it trades for close to 40 times 2012 expected earnings, and 33X 2013 forecasts. Like many of the stocks that are plays on “cloud computing,” whether they’re storage and hosting firms like VMWare’s parent EMC (EMC, they still own the lion’s share of VMW and control the company) or content delivery firms like Akamai (AKAM) or software companies like Salesforce.com (CRM) or many others, they’re pricing in dramatic and steady growth.
VMWare trades at roughly the same valuation as they have over the past year and a half or so — trailing PE of 50+, forward PE in the 30s, and a PEG ratio that says they’re trading for about 1.5X their expected growth rate, which is firmly in the “blue chip growth” category of stocks, and implies a pretty high level of investor certainty in their numbers. Which makes sense, since they’re a big industry leader and the analysts have lately gotten a pretty good handle on their earnings (their estimates have hit very close to the real numbers over the last two quarters).
Those same analysts have also bumped up earnings expectations in recent months, but only by a few cents, so there doesn’t seem to be any reason to expect blowout performance from VMWare, at least going by my very quick look at the company. I don’t know the business at all, or their competitive positioning, but they do reportedly have a technology lead still in virtualization and a large installed base, which gives them a continuing lead in their business and some pricing power to keep margins high … but they have big, scary competitors like Microsoft aiming directly at their core business, so it’s hard to know whether competition will hit pricing as it has for many other big technology companies. Growth has certainly slowed a bit from their bounceback numbers in 2009 and early 2010, but they’re still reporting growth that most companies would be thrilled to take to their shareholders.
It’s hard to put much specific credence in Navellier’s (too often made) promise that you’ll get a 30-50% gain in six months or your money back — but, of course, that’s a throwaway promise (it’s just a more dramatic way of saying that his newsletter comes with a trial period and a money-back guarantee, some variation of which is offered by pretty much all the big newsletter publishers). He did, after all, promise much the same thing last time around — he touted a 50% gain in six months, and said the stock was poised to double investors money in the coming year, and though VMW got up to highs of almost $110 close to a year later, for close to a 40% gain if you happened to sell at the absolute top, it never reached those teased performance predictions. Not a surprise, of course, there’s a reason why they put their “promises” in quotes and use lots of “could, should, might” qualifiers, the newsletter copywriters can’t predict the future much better than we can.
For what it’s worth, I’d probably prefer to look at VMW’s parent EMC, since that gives you more diversified access to the “cloud computing” underbelly (storage as well as server virtualization) and it effectively gets you controlling interest in VMWare at a lower price — EMC is not a drop-dead bargain as it arguably was years ago, when folks ignored their VMWare ownership, and there’s no promise of 50% gains in the blink of an eye, but it is a stock that trades much closer to the market multiple and still has at least half the upside of VMWare (since the VMWare ownership accounts for more than half of EMC’s market capitalization). Stocks that are priced at a strong premium to the market can, of course, remain at those premium prices for a long time — but they also tend to fall very, very hard if the company has a bad quarter or warns analysts about weak growth ahead (which, if they’re still market leaders just hitting a soft patch or a slow point in their product cycle, is often a time when you get a chance to buy them at discounted prices). I don’t own either of those stocks personally.
Of course, that’s the back of the envelope scribbling and the barstool argument — you’ll want more than that if you’re putting your own money at risk, of course, and you’ll find plenty of pundits out there in the great world of financial jibber jabber who’ll tell you what they think of EMC and VMW and any other “cloud computing” stock you can think of (if you want a “stodgier” counterpart to Navellier’s growth-focused opinion, Morningstar’s analyst thinks VMWare at $100 is trading at about a 30% premium to “fair value” and EMC at $30 is trading at a very small discount to “fair value,” just FYI).