Frank Curzio has graced the pages of Gumshoe quite a few times over the years, under the aegis of several different publishers, but this is the first time he has actively promoted his new self-published “front end” newsletter, Curzio Research Advisory (he launched his “back end” newsletter, Curzio Venture Opportunities, late last year).
I don’t know whether Frank keeps track of his personal returns over time at all those letters or treats his picks as a portfolio, or whether his picks, on average, beat the market, but he’s certainly had both good and bad ones in the years I’ve covered his teaser ads. I don’t think I ever covered his small cap stocks newsletter over at TheStree.com when he was working under Jim Cramer a decade or so ago, and his stint at his dad’s FXC newsletter before that was before our time here, but the big marketing machine at Stansberry certainly threw his notions at the Thinkolator many times in the years he was there, and then after his letters failed at Stansberry his brief stay with Weiss generated a few hype-y ads… and his name sometimes pops up when looking into Marin Katusa, since the two are often enthused about the same natural resources stocks and private placements (and Katusa is often a guest on Curzio’s excellent free podcast).
So I imagine I’ve written 50 or so articles about his teaser picks over the past decade, with a few that have generated phenomenal returns in either the short or long term… and a few that have since gone bankrupt or disappeared. Many of the most heavily hyped ones were for Stansberry’s priciest Phase 1 newsletter, and those often pop up as the worst performers on our tracking spreadsheets (lots of junior miners picked during the last bull run for gold, for example, or more speculative little uranium miners or tech stocks), though it’s unlikely that he still holds or recommends many of those now… so although I do like and recommend his Wall Street Unplugged podcast, and I appreciate his fairly no-nonsense style and enthusiasm, I don’t know whether his favorite picks are going to make you rich.
How’s that for a disclaimer to get us started? Curzio’s attention-getting headline in this latest wave of ads certainly works to grab our eyeballs:
“Silicon Valley Solves Social Security Problem… Forever?
“Revolutionary Device Promises to do What Both Political Parties Have Failed to do for Decades….
“And Could Make You a Fortune in the Process.”
You can see the whole ad here if you want to, but that basically boils down to “the Internet of Things is going to save the government so much money that we won’t have to worry about Social Security anymore” … which is, obviously, a little silly.
But that’s not the point — not really. The point of that Social Security reference was just to get your attention, and, in case that reference wasn’t attention-getting enough, some versions of his ad also note that Trump will be the most popular president of all time as a result of this same “miracle”:
“… far from the inner circle of the D.C. establishment, teams of high-tech engineers were creating what some might call a ‘miracle device.’
“A breakthrough technology that, if implemented by the federal government, could ultimately save Social Security.
“And not only save it…
“But add billions, perhaps trillions of dollars to the government coffers.
“In fact, what I’m about to show you could be the one thing that turns Trump’s historically unpopular presidency into one of the most celebrated of all time.”
But yes, it’s all about the Internet of Things — which is certainly a booming trend that is gradually having an impact on just about every big business (and government) in the world.
It’s a very diffuse trend, though, with thousands of different companies coming at it from every angle, and no one clear product or technology that’s obviously leading in a significant way… which makes it easy to guess at the big picture impact as the world gets more efficient and smarter, but more difficult to assess which specific companies will do better than others as the trend makes headway.
Certainly it seems unlikely to be a “winner take all” or oligopolistic business like social networking or internet bookstores or even PC chips or smart phones, at least right now, which probably means that no company or standard has taken a big enough share of the market that everyone else is willing to either line up behind them or shift to other strategies. We’ve been talking about the Internet of Things for at least five years already and it is gradually maturing… It’s a real industry now, with real revenue, and there are probably ways to improve your investing odds by playing along with the broad trends, but at this point, I think, if you choose a 1,000% winner here you’ve probably either got a fair amount of luck on your side or a powerful and predictive imagination.
Does Curzio have either of those things? Well, let’s see what stocks he’s hinting at, and we can decide for ourselves. Or, perhaps, come back in a few years and check to see if the ideas played out as he promoted.
The Social Security notion, by the way, is built on Curzio’s reference to the big leaps that some cities and governments have made in using various “IoT” sensors and networks to improve efficiency, usually with pretty early-stage stuff like smart streetlights, internet-connected parking or traffic/toll systems, and utilities and energy efficiency. There’s an interesting paper up as part of a Harvard project. here describing Barcelona’s experience with some of this work, that seems to be where Curzio got a bunch of his city data, and the possibilities are, of course, real — though all those things also take fairly substantial capital investments that aren’t often referred to in the efficiency numbers, and come with ongoing maintenance and obsolescence risks that we probably don’t understand all that well in these early stages.
And much of the urgency for his picks comes from this notion that the Feds are going “all in” on IoT investments — here’s a little snippet of that from the ad:
“Now consider that the U.S. government is the single largest enterprise in America, according to the Govtech Fund, a venture fund focused exclusively on government technology startups.
“And that governments around the world spend more than $400 billion every year on technology.Are you getting our free Daily Update
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“To put that into perspective, Walmart, the world’s largest company, spent $10.5 billion on IT in 2015.
“It’s not hard to extrapolate the numbers…
“Over the next several decades – as the Social Security funds would otherwise become depleted – the government could be making trillions of dollars.
“In fact, this chip could not only save Social Security… it could literally make good on Trump’s promise to ‘Make America Great Again.'”
He also references a presentation that McKinsey made last year, which is interesting in that it both lays out the potential of the IoT market as a huge “value pool” (they throw out the notion of $100 billion in platform revenues as the potential, estimating $10 per connected device and 10 billion devices) and reinforces the immense competition and the rapid rate of change as new platforms are being built, without any place where there’s a clear winner outside of some very small niche areas. You can browse that presentation here if you’re curious, it’s a year or so out of date now, and I have no idea whether or not it’s really accurate in all respects, but it provides some good perspective.
And then, as promised, we finally get to the actual “secret” investments Frank is going to be recommending…
“For you, as an investor, the fact this chip could save – even improve – Social Security doesn’t really matter.
“Because the amount of money you could make by investing in this technology today could easily fund a comfortable retirement.
“This is a megatrend unlike anything we’ve seen.”
And then the first stock he hints at:
“Why the Richest Bankers on Wall Street are Throwing Money at This IoT Chip Maker
“I’ve had my eye on one powerhouse chip maker for quite a while…
“I bet not one in a thousand investors has ever heard their name but, for years, they’ve dominated the market in one very specialized and high-growth area – making chips for use in the mobile internet market.
“I’m talking about things like iPhones and iPads… and more recently virtual reality devices.
“Their chips, amps, and switches power nearly all leading wireless technologies, including LTE, WiFi, Bluetooth, 3G, 4G, 5G… you name it….
“The company’s list of clients reads like a who’s who of Silicon Valley – companies like Apple, Google, Microsoft, Cisco, Dell, NetGear, Garmin, and Lenovo… just to name a few….
“Recently, this company began transitioning into the IoT market.
“And has become the biggest pure-play for investors in the Internet of Things, by far….
“Today, the company currently manufactures about 2,500 kinds of chips, which are now being used in countless IoT devices – from smart thermostats and security systems, to meters, lighting, building controls, autonomous cars… even farming applications.”
And, to further delight the Thinkolator with some specifics, we get this:
“The company’s strong product demand helped earnings grow from over $3 a share in 2014 to nearly $6 in 2016. That’s more than 35% annual growth.”
This, sez the Thinkolator, is Skyworks Solutions (SWKS), the chipmaker that has primarily benefitted from the huge volume of iPhone and other high-end smart phone sales over the past few years. Their huge reliance on Apple as a customer is a concern, and it is what led to the revenue growth slowing down a bit over the past couple years — the surge from iPhone volume growth in 2015 was dramatic for Skyworks, and they haven’t been able to recapture that incredible growth since. They are still growing earnings, and certainly at an above-average rate, but nothing like that spike they had in 2015 (they had a few quarters with near-60% revenue growth a few years ago, whereas revenue growth over the past few quarters has often been negative as Apple’s iPhone sales have failed to regain those old peaks).
Still, Skyworks has certainly been trying very hard to move away from over reliance on Apple over the past few years, mostly by focusing their efforts on the broader “connectivity” markets that we associate with the Internet of Things — and it makes sense. Their strength has been in enabling phones to handle communication on multiple different frequencies while moving and adjusting power demands, and as more tiny non-phone devices are communicating with broader networks, whether cellular or wifi or GPS or whatever, that demand should be strong. I think we’re a ways from knowing what the pricing power might be for those technologies in IoT applications, since a $4 chip in a $800 iPhone is a very different economic driver than a chip in a $50 toaster or portable $10 sensor of one kind or another (and that doesn’t mean pricing can only go down — Skyworks is also actively pushing more into the automotive and healthcare sectors, for example, where reliability and durability demands are tough but prices can be very high).
So Skyworks remains very much an Apple-satellite of a company — they still get more than a third of their revenue from Apple, mostly from iPhone chips, and they’re probably even more connected than that to Apple in the minds of investors who remember the Apple-driven rise in the shares in 2014 and 2015. And I would imagine that the stock will be pretty volatile as iPhone 8 rumors begin to circulate more actively — Apple suppliers have already taken some hits this year as rumors about Apple designing its own chips or switching suppliers have surfaced, and the expectations are quite high for this new phone restoring Apple’s volume growth after a couple tepid years, so that will probably have more of an impact on SWKS over the next six months than anything about the IoT possibilities of the future.
The business is gradually getting stronger and more diversified, though, so that’s appealing, and they have been winning new non-Apple business — including Huawei, in China, which is a pretty big deal, so there’s some reason to look beyond the iPhone — just don’t expect the market to think deeply about things if there’s a rumor that Skyworks will have a smaller presence in the next iPhone than they’ve grown accustomed to… if that happens, the shares could easily crater. It seems somewhat unlikely to me, given the tight relationship between the two companies in various amplifier and connectivity chips over the past few years, but I’m certainly no expert on Apple’s chip sourcing plans.
The stock is in a pretty nice spot here, actually, though it has run up sharply so far in 2017 on the back of that nice earnings surprise in January. The valuation is fairly reasonable at about 16X estimate d2017 earnings (non-GAAP, naturally — like most tech stocks, the GAAP stuff makes it look worse because it assumes that the stock options they give their employees have value despite the lack of a cash cost — if you insist on GAAP, they’re at about 19X expected current-year earnings). That’s not unreasonable for earnings growth of about 10% this year, 15% or so next year, and perhaps 8%+ going forward beyond that… assuming, of course, that the analysts know what they’re doing in making those estimates (SWKS does offer pretty detailed guidance, so the current-year numbers are probably fairly close — big moves from SWKS of late have come not from beating earnings estimates, but from issuing more optimistic guidance).
And it’s a decent-sized company, with both that IoT trend working in its favor and the possibility of upside surprises this year if the next iPhone really blows the market out of the water (which seems to be the between-the-lines expectation of a lot of people, though the Apple estimates are pretty conservative on that front so far). So you could certainly do worse.
I have a small position in Qualcomm right now, and I like Skyworks for many of the same reasons I like Qualcomm, as a networking player for an increasingly networked world, so I’d consider adding SWKS to that position (I would have added more to my QCOM position by now, but their legal and patent risk is sufficient to give me pause… as, of course, it’s caused QCOM shares to be much cheaper than they typically have been in the past). Skyworks comes with specific-product risk, Qualcomm with legal risk, but they have fairly similar valuations overall, particularly if you look at PEG ratios to normalize for expected growth rates, and Skyworks clearly has more long-term growth or “surprise” upside potential just because of its much smaller size and relatively nimble management. (For what it’s worth, Broadcom (AVGO), the other major player that often comes to mind in this space, is also pretty similarly valued right now on a PEG basis — bigger and cheaper but also growing more slowly — both SWKS and AVGO are up nicely this year in no small part because of those rising expectations for the next iPhone).
So that’s one IoT idea from Curzio, and it’s not really a shocker — that’s a stock he has mentioned plenty of times over the years, and it’s a stock that growth investors have been aware of for a long time. Interestingly, in a connection to what has been an oft-touted stock over the past year, Barron’s reported last week that Pacific Crest issued ratings changes that implied they’d recommend taking profits from NVIDIA (NVDA) and putting that money into Skyworks instead.
What’s next in Curzio’s new ad?
“I’m talking about the story of a rock-solid utility company that was founded more than 120 years ago.
“Over this time, it’s operated dozens of businesses… including lighting, transportation, industrial products, power transmission and medical equipment. And they’ve grown into one of the world’s most powerful companies as a result.
“But today, they’re switching gears again…
“And a century-old industrial giant is becoming a powerhouse in the Internet of Things.
“So much so that I expect this company to easily outperform the market – as well as tech stalwarts like Apple and Microsoft – over the next 24 months.
“In fact, they’re likely to outperform the markets over the next five to 10 years.”
This is also not a shiny new idea from Curzio — what he’s pitching here, I can tell you without even throwing the rest of the clues at the wall to see I they stick, is good ol’ General Electric (GE), a stock he’s been recommending on his podcast and in free articles (like this and this, both from the first half of 2015) for at least two years now because of its transition from “giant financial conglomerate” to “IoT-powered industrial technology company.”
GE has generated quite a bit of news in recent years, first for its big move out of financial services, as they’ve sold off some of those huge divisions that had the Fed regulating GE like a bank back following the financial crisis; and second, for the acquisition of Baker Hughes announced last Fall that will, if all goes as planned, turn GE into a much larger player in oilfield services — which has made some investors nervous, given the volatility of oil prices and the boom and bust periods experienced by most of the big oil services firms over the past decade.
But yes, the Industrial Internet, as GE calls it, is still a big focus at the company, including the Predix platform that they’re trying to establish with many of their major clients. And while it may not be dramatic as a line-item in the income statement in the near future the way, say, gas turbines are, it is likely to be meaningful.
The challenge, of course, is that GE already has $125 billion or so in annual revenue, and it’s a $260 billion company, so it’s important to keep expectations in check a little bit. They do have a lot of cash and liquidity, largely because of those major sales in the GE Capital business, but they are growing earnings, and they are expected to grow earnings per share this year by about 10% an, more impressively, by about 20% in 2018. That’s powerful for an old-line, blue chip, mega-cap company like GE.
There are risks, to be sure, in the larger exposure to oil and gas… and there are the regular risks of an industrial company that is very much dependent on broad economic growth and on big-ticket investment in stuff like new power plants and new factories, so we probably won’t see GE putting together strings of great revenue growth in a recession… but, probably in part because of that cyclical nature, it’s cheaper than the market, growing faster than the market, and paying a higher dividend than the market (about 3.2% now), so it’s hard to argue against GE as a long-term investment unless you dislike the Baker Hughes transaction or think they’re going to otherwise screw things up in a pretty big way. (By way of comparison, the “safe haven” blue chips like Procter & Gamble (PG) or Colgate Palmolive (CL) in areas like consumer staples, where folks run to when they want dividends and less cyclical exposure to economic growth, are generally much more expensive when it comes to earnings or dividend yield, and are growing at much slower rates.)
And, yes, it’s possible that GE will grow a little faster than expected if their IoT platform and its integration with their old-school industrial machinery helps to drive sales growth a little higher, though I’d keep my expectations a little bit in check. Sales of gas turbines and jet engines and MRI machines will still be the big drivers for GE, and the other makers of those kinds of capital-intensive equipment are also doubtless trying to take advantage of the Internet of Things… they might not all be as good at it as GE at first, but they might catch up.
Curzio also notes a few other positive things about his unnamed stock, which we now know is GE:
“It’s no wonder a Senior Vice President recently purchased $200,000 worth of stock…
“And the CEO followed suit – purchasing $5 million worth on the open market.
“Keep in mind, this is the CEO of a major corporation.
“He doesn’t have to work another day in his life.
“So the fact he bought $5 million worth of his own stock at current levels is a huge buy signal.”
I don’t know about that, insider buying is generally a positive thing in the aggregate, but you don’t want to overreact to it in specific situations… in this case, CEO Jeff Immelt did indeed buy about $5 million worth of GE shares at prices from $29-31 in the second half of last year… but he was also given about $17 million worth of shares as part of his compensation just last month, and he sold about half of those that same day, at prices below what he had paid for shares a few months earlier. Yes, Immelt and his executives do own substantial amounts of stock… but payments in stock and/or options are also a substantial amount of their compensation, and, like most insiders, they tend to sell more than they buy. It’s nice to see them buying, but don’t overemphasize the meaning, especially for giant companies — Immelt, for example has not been particularly adept with his purchases and sales of GE stock (and if he were, he’d probably get extra SEC scrutiny).
And Frank also hinted at a third company in his piece, in robotics, but we’re running out of time here so I’ll leave that for another day. What do you think? Any interest in Curzio’s new letter, or plaudits or porcupine quills you’d like to send toward GE or Skyworks? Let us know with a comment below.