“Why the Next 90 Days Will Rock Wall Street Again” (Cabot)

Sniffing out some breakout candidates teased by the Cabot Market Letter

By Travis Johnson, Stock Gumshoe, November 8, 2012

“How you can protect yourself and profit with one quick move”

That quick move that Mike Cintolo of the Cabot Market Letter is suggesting is, you will be unsurprised, subscribing to the Cabot Market Letter.

But the Cabot folks are, in the main, growth investors who are driven by technical analysis (meaning, to oversimplify, that they try to see the future in stock charts) — and they’re not telling us to rush out and buy ammunition, gold bars, and freeze-dried beef stroganoff … no, they’re telling us that there’s something surprisingly good around the corner. That just fills my heart with joy, so I thought I’d read through and see if these cockeyed optimists have some money-making ideas to hint around at for us.

And tell you what they are, of course.

So what’s the pitch? Here’s how it opens:

“With Europe continuing to implode, the contagion spreading to Spain and Italy, and US unemployment continuing to rise, it’s clear the market’s volatility is about to increase exponentially–especially as we head toward the end of the year when the automatic spending and tax cuts (known as the Fiscal Cliff) are implemented.

“For these reasons, the next market move we see headed our way in the next 90 days could be the biggest shocker of 2013.

“Surprisingly I’m NOT talking about another MAJOR SELL OFF that the financial media is forecasting.

“On the contrary, our time-proven technical indicators are forecasting a MAJOR BREAKOUT ahead for a select group of stocks.”

Yay, a breakout! OK, so what are his “select group of stocks?”

Don’t worry, we’ll get there — but let’s get a little more of a sample of his optimistic spiel first, shall we?

“As you’ll see in tonight’s Cabot Market Letter unlike unscrupulous CEOs, who we know can lie and cook the books, and the financial media, who can skew the news to sell ad space and commercial time, the charts simply can’t lie.

“They can tell you in precise details what’s going on behind the scenes…as they track volume, pricing, options contracts, and short interest and the like.

“In many ways, our technical system acts a lot like an advanced Doppler radar system that not only can show you where a storm has been but also where it’s headed–and with pinpoint accuracy proven over the past 42 years.

“That’s why I can tell you that the latest selling pressure was simply another ‘fake out’ designed to get weak hands to sell their stocks at fire-sale prices to savvy buyers like us who could see, beyond doubt, that a huge technical buying opportunity is at hand….

Don’t Buy the Double-Dip BS!

“If you do, you will miss out on the 30% to 50% run-up in select stocks our proprietary technical indicators are forecasting that will ultimately double investors’ money by this time next year.

“So, if you’re thinking there’s going to be a major sell-off, forget it!”

So that’s the idea — that they see more bull moves in the market, particularly for the “best of the best” growth stocks that they favor, and they think you should be buying ’em up right now. Here’s more:

“As you’ll see in tonight’s Cabot Market Letter (posted online), our indicators are beginning to explode like fireworks on the Fourth of July.

“In fact, we are seeing a lot of smart money moving directly into our stocks, as nearly all are on tap to deliver blowout earnings.

“The results should hand us not only a 30% to 50% gain in the run-up to earnings but similar gains in the months after the election as our time-proven indicators continue to show upward momentum for our top-rated stocks thanks to their breakout sales and earnings.

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“Judging by the activity we’re tracking, we could be looking at a few doubles this year.”

(I got this ad on November 7 after the market close, and the “special offer” they’re making expires on November 10, so these promises of theirs are quite current, just FYI.)

So what, then, are those “best of the best” growth stocks that they think will break out and double in price, after perhaps quick 30-50% gains in the near term as we run up into earnings reports? We do get hints about a few of them, so it’s time for some Thinkolator action.

“Our top tech play here has already handed investors 70% gains over the past nine months and is set to double, triple and perhaps even quadruple these great gains in the months ahead.

“The reason is simple–this relatively unknown company is at the heart of the world’s Internet. That’s right! About 90% of the total traffic in the world flows through its data centers, which means all the big players are customers.

“The company’s co-location and interconnection services are in huge demand all over the world (no surprise that Asia is a main area of growth right now), and best of all, these services provide tremendous recurring revenue. An amazing 95% of this company’s revenues are recurring….

“The company recently announced that it’s transforming itself into a real estate investment trust structure, something that will provide huge tax benefits and monstrous dividends in the years ahead. Plus, compared to some smaller peers that have already made the switch, this stock is dirt cheap!

“All together, earnings are projected to mushroom 56% this year and another 44% next as business accelerates. We think the sky is the limit.”

This one, says the mighty, mighty Thinkolator, is Equinix (EQIX)

EQIX is one of the major global data center companies, and they are pursuing conversion to a Real Estate Investment Trust (REIT), though that would likely be in about two years according to this recent announcement. And they have done substantially better over the last year or so than the two decent sized data center REITs that already exist, those being Coresite (COR — which I suggested to the Irregulars about two years ago but called a “hold” back in February when it was around $20, it has taken a bit of a dip lately so I’m getting interested again) and Digital Realty Trust (DLR).

DLR is the largest data center REIT and has the highest yield in this space, and is similar in size to EQIX, so it seems reasonable to compare them to EQIX as a possible competitor — and at the moment EQIX looks pretty similar. If you use enterprise value/EBITDA metrics to try to smooth out differences in the way these companies treat debt and depreciation, EQIX is at a EV/EBITDA ratio of 14, DLR is at 17, and COR is at 8. DLR and EQIX both look a little pricey to me, but I would expect that from a Cabot-suggested company, they recommend growth stocks because those stocks have proven that they’re doing well by rising in price, so they often look expensive.

I’ve been too cautious on some of these “digital real estate” plays before, particularly American Tower when it was being aggressively touted by the Motley Fool for the first time a couple years ago, well before it converted to a REIT, so you might want to write off my concerns about frothy prices — I didn’t buy that one back in the Spring of 2010 and it has just about doubled over that time. And yes, I still can’t help but think it looks expensive as a REIT with a 1% yield … one of many weaknesses I must confess to is a kneejerk reaction to high valuations even if a stock is growing quickly. Doesn’t mean I can’t or don’t buy them sometimes, but it’s hard for me to do. All these companies are growing very nicely, EQIX has the possible kicker of a REIT conversion in a couple years that will give them more tax efficiency (and a dividend, if they don’t announce one before that), but I still migrate to COR, which has a lower yield but on other metrics seems more inexpensive to me. Outsourced data centers are certainly a growth business, even with big players like Amazon and Facebook building their own centers, and I still do like the idea of earning a nice growing dividend yield on this growth trend. Just wish, greedily, that the stocks were a wee bit cheaper.

Cintolo hints at four stocks, but I only have time to sniff out two for you today (I’ll get to the others in the future if there’s interest) — here’s the second one I’ll look at quickly:

“This retail stock has been a big leader all during the bull market, and now, after a multi-month rest period, the stock is about to be off to the races again.

“This company’s story is plain and simple–it’s set to be the next Nike. And the beauty of it is that, as a retail stock, it’s runway of growth is incredibly huge; this is no chip stock that will light up the sky for five months and then fade away. No, these retail trends, once established, go very far. And this is our favorite retail story in the entire market!

“Most of its business is athletic apparel, but its new, innovative athetic footwear products are taking that industry by storm. It has just 1% of the market, but revenues there are growing north of 40%! All told, we see years of 30% sales and earnings growth from this firm, and the stock is likely to make investors very wealthy.”

This one, sez the Thinkolator, is clearly Under Armour (UA), which has been a growth darling for most of the six or so years since it went public — and which has “looked expensive” for most of that time as well, as it does now. The fear in UA’s early days was that they would be crushed as folks like Reebok and Nike took interest in their performance apparel niche and overwhelmed the tiny Under Armour, and there has certainly been competition, but the “story” has really instead been of a new brand being built that caught the big existing brands by surprise — and yes, UA has been for a few years now trying to break into the performance footwear segment, starting with a football show a while back and expanding into more broad based shoes, but they are still a very, very teensy part of that market and it remains an area where they could see potentially significant growth if they get it right. There’s a good article about them and their shoe plans here from Investors Business Daily, itself a bastion of momentum growth lovers (not that there’s anything wrong with that).

So there’s room for growth, and the stock is priced for growth — it’s running in the neighborhood of 40X earnings lately, with the analysts forecasting that earnings growth will tail off somewhat over the next five years but still come in at around 20% a year, which is perhaps a reasonable guess given the company’s increasing size. They’re now a $5 billion company versus Nike’s $40 billion, and NKE is probably going to grow earnings at more like 6-8% … so actually, they’re both trading at similar valuations if you incorporate their growth forecasts — both have a PEG ratio of about 2.0 (forward PE estimate of 16 divided by estimated growth rate of 8% … US forward PE ratio of 35-40 divided by estimated growth rate of 20%), which is on the top end of what’s reasonable for most investors. There are outliers, of course, like Amazon’s absurd PEG ratio of about 72, but big growth stocks often have a hard time trading for much more than twice their growth rate unless they have real “blue chip” status or pay a big dividend.

I’ve got a soft spot for Under Armour, probably because it was founded by a Maryland alum when I was in grad school there, and it does have the kind of profile that appeals for growth stocks — big enough to be consistently profitable and have a good supply chain and retailer relationships, but small enough to still grow much faster than their competitors, and with a growing and powerful brand. I haven’t owned the stock, and I do again have trouble with PE ratios that are this high, but I can see why you might want to take a nibble as they move into their core retailing season — if they can beat next quarter as they have in most past quarters that might make investors very happy, indeed. Their earnings release for this key quarter won’t come until January 21, so there’s no particular urgency on that front, but apparently the technicians like Mike Cintolo think you need to be buying it now.

So there you have it — two pricey stocks with great growth and, according to the Cabot Market Letter folks, appealing technicals that are indicating dramatic performance in the months to come. Do you buy it? Think UA and EQIX will be exciting to own over the next few months? Or do you get stressed out by those high PE ratios and fear the momentum-driven growth stocks with good charts? Let us know with a comment below.


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