“From ‘Strong Buy’ to ‘Back up the Truck'”

By Travis Johnson, Stock Gumshoe, March 29, 2010

I can’t pick on Robert Hsu too much for this, because it’s just about the most popular turn of hyperbolic phrase around for tv pundits and newsletter writers … but really, I’ve had just about enough of “back up the truck.” Not only does it not make much sense — does backing up the car mean you’re only buying a few shares? — but it encourages the all-or-nothing bets that damage so many portfolios.

Still, when he tells us to “back up the truck” I can’t help but want to figure out what he’d like to … I don’t even know how to say it, “back up the truck with?” Or toward? Whatever, let’s dig in and identify the stock, shall we?

“In tonight’s issue of China Strategy, I’m not only upgrading the buy rating on one the most phenomenal companies I’ve seen in years … but also adding a new ratings category: Back Up the Truck.

“I know that this kind of ratings description sounds quite gimmicky.

“But frankly, this is only description I could think of that not only communicates the superior strength of this recommendation, as well as the ground-floor profit opportunity at hand that few others can see.

“’Super-strong buy,’ I’m afraid, simply wouldn’t cut it.Don’t Miss This

“However, once you see my full write-up on this, I know you’ll agree “Back Up the Truck” describes this money-doubling opportunity to a ‘T.'”

OK, so it’s a money-doubling opportunity … and Robert Hsu isn’t going to give us much more etymology on why backing up a truck is an aggressive investing strategy … how about the clues?

“Surprisingly, it’s a technology outsourcing company that’s stealing market share from multibillion dollar Indian companies and rewarding investors along the way.

“Here’s how:

  • “The company was originally formed in 1994 to help Microsoft and IBM localize their software into the Chinese, Japanese and Korean languages.
  • “As a result, the company—with more than 5,000 IT professionals—already provides world-class services to corporations in the U.S., Europe, Japan and China.

  • “This is how the company has been able to steal customers and profits from Indian IT firms for the past five years—growing from 98 customers in 2005 to 241 customers in 2008, including Microsoft, IBM, Hewlett-Packard, EMC Corp., NEC Corp., 3M, Huawei and Lenovo.

“This is why last quarter’s revenues increased 43% while net profit jumped 40%. This is also why the company’s stock price up a whopping 345% in the last 12 months. This is also why the company is clearly headed for another double in 2010.”

OK, so who is this Chinese company that’s apparently doing the Indians one better?

Well, I’d like to say that I really had to warm up the Thinkolator on this one, and dig deep … heck, I could even tell you that I had to “back up the Thinkolator” to figger this one. But I’d be lying — I can tell you that this company is VanceInfo Technologies (VIT) … but Robert Hsu can tell you this, too, and has done so in some free articles lately.

So not only does he think you’re silly enough to think it’s reasonable that he has a super-duper-extra-strong buy category called “back up the truck” … but he also thinks you’ll pay to learn about an idea that he’s already tried to tell you about for free.

I know, I know, that’s not the real reason most thinking people subscribe to newsletters — they don’t (or at least shouldn’t) sign up just because a hot stock is teased and they just want to learn the name. They should be looking to buy thorough research, maybe some educational materials, an entertaining read, etc. But in reality, so many newsletters wouldn’t build their ad campaigns around a teaser pick unless that was the idea that worked best at snagging subscribers. So yes, there are probably a lot of folks who signed up for China Strategy just to find out who this “back up the truck” company is.

And back in February, Robert Hsu told anyone who would read his free blog that VanceInfo was his Chinese outsourcing play (and yes, it also matches all those clues — have no fear, I did percolate the thinkolator for at least a few minutes, just to make sure). And from what I’ve gathered in a quick look around, it seems that Hsu has been touting this stock to his subscribers for close to a year if not longer, so, to be fair, it has been a favored Hsu pick since well before it hit a new 52-week (and all-time) high price a little while ago.

VanceInfo also just got upgraded last week as a skeptical analyst capitulated, saying that the expected sales growth of 40% seemed more achievable than first expected. I have no idea whether they’ll hit those targets, but they do need to grow pretty smartly to justify their valuation — the stock trades at about 25X estimated 2011 earnings, and for the current year (also all estimated, it’ll be months before they report the first quarter) the PE is about 30. Analysts expect earnings growth to come in at just about 30%, too (that’s just about where it has been for the past several years), so the stock ends up with a Price/earnings/growth (PEG) ratio of almost exactly one, the number under which stocks are typically considered a bargain by many fundamental Peter Lynch-style investors.

That valuation has VanceInfo looking a bit cheaper than the big Indian outsourcing firms — WiPro (WIT) and InfoSys (INFY) both also trade at pretty lofty valuations on current and future earnings, but they’re also predicted to grow far less quickly, so the PEG ratio is closer to two, at the upper end of what a lot of folks who use that valuation method are willing to spend. That’s perhaps as it should be, since both are far, far larger and more established, and might also expected to be far more stable — WiPro is about a $30 billion company, InfoSys larger still, and VanceInfo has a market cap of less than one billion, still very much a small cap stock.

If you’re interested in this broader idea of technology consulting and outsourcing, by the way, there was a quick and informative article over at the Motley Fool last week that might be worth your time (it focused on the Indian stocks, not this one, but it’s good to have a handle on the whole industry before jumping on a new stock idea).

So that, it seems, is what Robert Hsu’s is calling his “back up the truck” stock … what do you think, interested in bringing the truck more back-er, or are you a bit suspicious about what that truck might hold? (It is the time of year when many of us are ordering truckloads of >ahem< fertilizer, after all). Let us know what you think with a comment below. And if you're curious about how Hsu’s subscribers feel about China Strategy, you can click here to see their reviews (or, of course, add your own — we’re always looking to learn more about the newsletters that Gumshoe readers love and loathe).

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