For those who find themselves feeling a little nauseous about an imminent financial collapse, inevitable hyperinflation, the death of money, the end of America, the zombie apocalypse, or whatever other kind of armageddon is being used to pitch newsletters I offer a simple antidote: read a teaser ad from Louis Navellier.
I assume it’s Navellier’s copywriters putting together these ads, not the guy himself (that’s the way it works at most newsletters — I even have newsletter editors emailing me sometimes because they don’t know which stock their marketers are teasing in an ad), but he is so growth-focused and excited about the potential of the stocks his system spits out for consideration that it serves as a nice antidote to the “buy gold and ammunition and freeze-dried foods” crowd.
That doesn’t mean he’s right, of course, or that it’s necessarily worth subscribing to his services (the one being advertised today, Emerging Growth, will run you about $400/year “on sale”)… but sometimes a little growth enthusiasm soothes the soul of the worried investor.
So what balm does he offer today? He’s predicting a “small-cap surge” — and has three stocks to profit from it, which we’ll suss out for you in a moment. Here’s how he opens the ad:
“Wall Street Is About To Get Rocked By The ‘Small-Cap Surge’
“It’s happened before and made a handful of savvy investors ridiculously wealthy.
“Now, it’s your turn. Capitalize on the next ‘small-cap surge’ today.”
Don’t you feel better already. Deep breath, ahhhhhhhhh….
His big-picture spiel is partly about the strong dollar, and the fact that the strength in the dollar hurts multinationals and helps domestic-only companies, which tend to be smaller. More from Louis…
“In fact, I’d say only about 15% of the mega-cap stocks today are even worth investing in any more…Are you getting our free Daily Update
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“Of course, Wall Street’s pundits still believe in the ‘too big to fail’ rule and if you listen to them now, you’re in for a world of hurt.
“Because there’s no way around it… A ‘seismic shock’ is rumbling through the S&P 500. And it’ll have profound consequences for the overall market.
“Here’s what I see coming… A massive flight away from multi-national stocks to stocks with strong domestic sales and real earnings growth. I’m talking about a ‘surge’ of small- to mid-cap stocks.
“Because domestic stocks are already dramatically outperforming internationals…”
OK, so there’s some reasonable logic at play. A strong currency hurts exporters in general, and we’ve seen lots of big-cap stocks talk about exchange rates as a drag on earnings… though specific situations are always more nuanced, and lots of big companies will trot out any possible excuse for weak performance, from weather to holidays to exchange rates (and as Japan and Europe are seeing now, there’s no guarantee that a falling currency will boost your economy).
So companies that work primarily within one economy don’t have to worry nearly as much about currency exchange rates, which is nice. Here’s a bit more from Navellier before we get into the specific stocks he’s teasing:
“Because as the market shifts down, the kind of stocks I exclusively recommend in my Emerging Growth Buy List are turning out to be an oasis.
“You see, my Emerging Growth stocks have average forecasted annual earnings growth of 91.8%, and average forecasted annual sales growth of 51.9%….
“As a result, I expect our Emerging Growth stocks to benefit immensely from the “small-cap surge” now underway.
“In fact, there are 3 stocks I recommend my readers buy immediately to maximize profits for the short and long term. And I want to share them with you right now…”
Holy cow. 91.8% annual earnings growth is ridiculous. Not a lot of stocks hit that benchmark. So which ones are being pitched by Navellier today?
He does give us the first one for free, here’s the short version:
“My #1 Pick for the Small-Cap Surge….
“In the last two years, my #1 pick — ANI Pharmaceuticals, Inc. (ANIP) — has rallied an incredible 764% because it’s bringing quality pharmaceuticals to market, and growing its sales and earnings.
“In fact, just last week… the company announced record earnings. Fourth-quarter sales surged 100%. Operating income soared 211%. While adjusted earnings per share went up 86% from last year. And these incredible numbers were even better than analyst expectations as ANIP posted a 15.5% earnings surprise and a 16.8% sales surprise.
“Company management noted that this record fourth quarter was a ‘direct result of continued organic revenue growth.’ The two products it acquired in the third quarter (one for patients with bipolar disorder and one for treating colon infections) coupled with new product launches contributed to the strong sales growth….
“Next quarter, analysts are expecting 84% sales growth and 57% earnings growth…. I recommend buying with both hands today.”
I know nothing about ANIP, other than that it’s profitable and still quite small (market cap around $800 million) and is expected by analysts to more than double earnings this year and continue to grow rapidly after that (40% growth estimates next year, 20% annually after that is what they use in their models). If that actually happens, then the stock is dirt cheap at less than 20X next year’s expected earnings.
According to the public page Navellier puts up for ANIP here, his system has rated it as an “A” (that’s good) for at least a year, so if you had followed that last March it would have certainly worked out well — the stock is up a couple hundred percent since then. Whether that continues into the future and enriches your portfolio, I’ll let you decide — feel free to comment on them below… I’m pretty sure ANIP has never come up in Stock Gumshoe discussions before.
But that’s just the “freebie” … as with many such pitches, Navellier throws that out as bait and essentially says, “if you like that one, wait ’til you see what’s behind the curtain!” Let’s check out his clues for the “secret” stocks:
“My #2 Pick for the Small-Cap Surge
“My next top stock is a great companion pick with ANI Pharmaceuticals. This one is a medical technology company that develops and sells products to make you skinnier.
“Note I didn’t say ‘lose weight.’
“These products help with the reduction of fat in a non-invasive (read: NO surgery) way. Apparently, when you cool fat cells in a certain way, they shrink, and this company helps people with those areas that aren’t helped with diet and exercise.
“Over the last decade it has become the leader in non-invasive body contouring procedure, with more than 22.4 million people in the U.S. interested in this procedure….
“In January, this company issued preliminary fourth-quarter sales between $51 million and $52 million, which is up approximately 44% compared with the same quarter a year ago. For full year 2014, the company expects revenue between $175 million and $176 million, about a 57% increase over last year.
“The company might just be starting to make the transition to profitability. But that means at this point the stock is a speculative buy. And that’s often where the biggest profits are made….”
This one, sez the Mighty, Mighty Thinkolator, is Zeltiq Aesthetics (ZLTQ). Navellier’s grade is summarized here on that one, and it’s instructive that the “A” grade comes despite a terrible “fundamental” rating… this one has a blockbuster quant ranking from Navellier because, as best I can tell, it’s going up.
OK, so that’s a bit too snarky. The stock is going up because the numbers have finally caught up, to at least some degree, with the enticing “story” of the company — they make a device that does what they call “CoolSculpting”, where they essentially chill “problem areas” (think “love handles”) to kill the fat cells. As Navellier rightly notes above, it’s not a weight loss procedure and it does nothing at all for obesity — this is an aesthetic procedure, for people who believe themselves to be an eighth of an inch in thigh circumference away from bodily perfection.
This makes me cringe, but I’m definitely not the target demographic — I expect I would probably require 40 pounds of weight loss, all kinds of surgery, and a major back-hair-removal program before I even got close to the point where I thought, “hey, my love handles stick out slightly too far — other than that, I’m ready for the magazine cover!” And no, I have no ambitions of getting there… and I very much hope that the “perfect contour” body worship that this represents fades by the time society wants my kids to look critically at themselves in the mirror.
But that doesn’t mean they company can’t make money — ZLTQ is trying to advance their product using the “razor and blade” sales model — sell the machine relatively cheaply, with service contracts and disposable “cool pads” that have to be used for each procedure setting up a long-term recurring revenue stream, one that feeds on itself to some degree because owning the machine helps to spur more use of the machine. The stock caught quite a bit of attention very early in its public life, this was a private equity-backed company that went public late in 2011, was pitched by Hilary Kramer early in 2012 and was featured by Jim Cramer around the same time (that’s the only time I’ve written about it), and then collapsed for a year or so as the early results didn’t measure up.
It’s been picking up since then, with the last 18 months or so, with a new management team and new versions of their products and new approved indications (parts of the body), and they’ve now had two profitable quarters in a row so “emerging growth” type investors are perking up their ears. It’s widely anticipated that the fourth quarter will be profitable as well, though just barely, and the stock has already run up 20% this year partly on that anticipation… and they report tomorrow — so unless you like to gamble on earnings reports or feel you have some great ZLTQ insight there’s probably no reason to rush and buy before earnings (the stock did jump up immediately after the last two earnings reports, as those first two profitable quarters were reported). The installed base has grown over the last 3 years from about 800 to 3,200, so it is certainly generating interest and revenue (sales have more than doubled, though they’ve grown slower than the installed base)… and they are projecting that 2015 will see the “consumables” rising to be 50% of revenue, which ought to help keep margins quite high.
I have no idea whether the device will remain strong, but it seems to be doing pretty well so far — and I likewise have no idea what the competition is, there are various injections and laser treatments for “stubborn fat deposits” that are used and marketed around the world, and this is very much a consumer-driven procedure… no insurance company is going to cover this kind of (or almost any) aesthetic treatment that’s meant to sculpt the body, so they depend on marketing, consumer demand, and pricing that’s competitive with whatever the competition might be, and the company depends on marketing to dermatologists and plastic surgeons and other practitioners by pushing the cash flow this can mean for a practice and the ability of CoolSculpting to bring more patients/customers in the door (you can get a sense of this from the company’s presentation at the January JP Morgan Healthcare conference here).
Navellier’s system gives a lot of weight to earnings surprises and estimate increases by analysts, so probably a lot of the optimism built into this stock is because they handily beat earnings estimates for the last two quarters, but the estimates for this next quarter (to be released tomorrow) are still very low, didn’t move up very much after those two beats, and might perhaps then be “beatable.” Sometimes that works, as analysts tend to be conservative, but it’s anyone guess what might happen — particularly since the recent strength in the stock indicates that investors probably are anticipating a big “beat” again.
We had quite a few folks chime in last time we discussed the stock several years ago, when things were fairly bleak in the numbers and they had just been offloaded onto the markets by private equity — how do you feel about it now, with a bit of revenue growth under their belt? Let us know with a comment below.
But first, we’ve got one more “Small Cap Surge” pick from Navellier to share…
“My #3 Pick for the Small-Cap Surge
“Rounding out my top 3 stocks is a leading semiconductor company. It makes incredibly innovative products integrated into everything from cars to medical devices to mobile phones to satellites and military radio applications.
“In total there are more than 3,000 products over 42 product lines.
“In just the last few days, the company announced financial results from its first quarter 2015. Revenue was up 36.5% and adjusted earnings per share beat estimates by 8.5%.
“For the upcoming quarter, analyst expectations are for just 18.5% sales growth and 21.9% earnings growth. Given that analysts have low-balled expectations for the last four quarters in a row, I expect this company will surprise Wall Street again and send shares on their next leg higher.”
He even goes on to specify that this one is thinly-traded, and should only be bought “within 25 cents of the previous day’s close” using limit orders… which is more detailed than they usually get with their teaser hints and clues. So who is it?
The chart actually has some similarities to ZLTQ, with an IPO that did relatively poorly in 2012 and 2013 before jumping to life and shooting upward, though the surge hasn’t been as great as ZLTQ’s… this is the very awkwardly named M/A-Com Technology Holdings (MTSI), which is sometimes referred to as MACOM.
M/A-Com is an old name in the semiconductor, networking and defense electronics business, though it’s been through a lot of change in 50 years. Most recently, it was a part of Tyco Electronics that got sold off in 2008 to Cobham, then sold again to investor John Ocampo, who helped to streamline the company and prep it to again go public in early 2012. Ocampo, who also serves as Chair of MTSI, and still owns almost 20 million shares, which is close to half of the company — though he and another private equity backer, Summit Partners, just filed last month to sell a portion of their stake at $30 a share as part of a large secondary offering (MTSI is also selling 4.5 million shares to raise more capital). The market wasn’t worried at all about that offering, so optimism is fairly high — and they’ve already reported for last year, so there’s not necessarily any catalyst coming (aside from any M&A that might prop up MTSI or the whole sector, like yesterday’s NXPI deal)… which to me means, “no rush, take your time and try to understand the company first.”
I’ve never heard of this company before, it’s fairly small (enterprise value of about $2 billion) in a business that is very competitive but also very specialized, with pretty tight relationships between product developers and the chipmakers who depend on being “designed in” to new products. They compete in many cases with the big analog chip companies you probably know better, like Infineon or NXP Semiconductor (which yesterday announced, to applause, that it would buy yet another large auto supplier, Freescale… also a levered private equity-backed analog chip company), though I certainly don’t know which firms have technological leadership in any slice of these markets — MTSI claims an advantage in the advanced optical networking and GaN markets, but you can peruse their investor presentation for yourself to get an idea of what that might mean.
They are very much a part of the ongoing consolidation in semiconductors, so far by being a major buyer of (relatively small) chip firms over the past couple years, and they’re targeting more acquisitions along those lines as they bring in new products and new R&D expertise — the goal, as with almost all growing chip companies, is to focus on their more advanced and more “value added” products and therefore to boost their gross margins. It was upgraded to an “A” just last week by Navellier’s system and, well, that’s about all I can tell you about the company in the few minutes I’ve got left… so I’ll pass it back to you, does MTSI appeal? I like the focus of the business and their recent financial performance, but I’m a little concerned about the potential for steady equity sales from their controlling shareholder depressing the price over time… and I’m not crazy about the debt on the balance sheet, but their cash flow can handle it, so — over to you, comment away!
P.S. ANIP, MTSI and ZLTQ all have pretty sizable and growing short positions, though that’s not unusual for stocks that have surged to fairly high valuations. Just thought you might want to know that. Enjoy!