Paul Mampilly is out with a new promo for his Extreme Fortunes newsletter, making this absurd promise:
“Anyone who joins my research service Extreme Fortunes, and invests $10,000 following my recommendations, will have the chance to earn a profit of $100,000… in the next year.”
So before we begin, let’s throw away that possibility. You’re not going to be able to think clearly about a stock if you go in with that kind of lottery-ticket mentality — and $10,000 is a lot more money than you would probably put into buying lottery tickets. Stocks do sometimes make 1,000% returns, though it’s extremely rare for it to be in a single year… and that promise implies that if you invest $10,000 into his basket of stocks or array of recommendations throughout the year you’ll have a chance at $100,000 in profits.
Some of those stocks are going to go down or provide very small returns, that’s just the nature of investing, so that means he has to have at least one pick that provides something far more dramatic, like 3,000-5,000% returns. (Alternately, if he said investing $120,000 a year, $10,000 into each pick each month, would present the possibility of one of those investments returning $100,000, the promise would be a little more rational but far less enticing).
But the newsletter publisher has something going for him: he knows that if Paul picks a stock that goes up 70%, subscribers will be delighted and will forget that they were promised 1,000% returns… and he also knows that while they’re promising those returns, they are NOT offering refunds on this newsletter, for any reason… so I’m not exactly sure what it is that’s behind that promise, other than Mampilly’s belief (probably sincere, I’ll give him the benefit of the doubt) that he can turn $10,000 into $100,000 for you.
But then they put “Paul’s Track Record” in the ad, and that makes it a bit more clear — it looks like he’s just adding up the percentage returns from each investment and somehow magically making it look like that’s your investment return. So to cherry pick the best gains he claims, back in January (of last year, presumably) he recommended Coeur Mining, which gave him a 738.87% gain, the GDX ETF, which returned 106.8%, and NVIDIA, which returned 108.56%…. and the ad implies that you can add that 738.87 to 106.8 and 108.56 and somehow turn that into a 950% return. That’s not how percentages work.
Those are great trades, of course, assuming that you could actually make them in real life (the CDE trade, for example, means you bought on his recommendation on January 15, 2016 and then sold at the absolute peak on August 9 for a ~740% return — people almost never sell at the peak and I don’t know when he might have recommended a sale … if you held to today, that return would be more like 400%)…
… but even making that trade perfectly doesn’t get you even close to having a 1,000% return on your investments with Paul Mampilly — just use the example he’s offering today of a $10,000 investment that he says he can turn into $100,000 within the year. If you had $10,000 to invest in those three stocks last January, and divided it equally, you would, according to the ad’s return calculations, end up with roughly $27,900 in CDE, $6,900 in GDX, and $6,950 in NVDA. That’s $41,500. So that’s a lovely return of 315% on your $10,000 investment in January, and a gain probably made in only about a half a year, so that’s worth celebrating… but it’s not the far more dramatic 950%+ return that they claim (they actually claim 1,124.71%, but that’s adding on picks made in May and June and July last year which returned anywhere from 3.5% to 44%). The math isn’t made up, but it’s misleading.
So ratchet your expectations down a little bit, and then we’ll go into looking at the actual “Extreme Fortunes” stocks they’re recommending today. It’s never good to count on 1,000% short-term returns, but it is possible to make huge gains on stocks that are selected well, particularly if you have a lot more time than that… and sometimes Mampilly does choose good stocks (though not always, of course) — right now he’s riding on some attention here in Gumshoedom because he has been banging the table for STMicroelectronics (STM) since late last Spring and that stock has indeed done quite well (and, to be fair, I didn’t like STM when he was teasing it and I don’t like it now, so I’ve missed those returns personally).
That STM pitch was for Mampilly’s less expensive $79 “entry level” Profits Unlimited letter, and when you’ve got some investors who are excited about a good pick or few you’ve made the time is ripe to hit them up for “my even better ideas” — at a much richer price, naturally. So Extreme Fortunes is now being pitched as the “upgrade” letter for $2,995 (no refunds).
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Mampilly then runs through a long list of stocks that his strategy would, after “rigorous backtesting” using the “DNA of stocks that are primed to jump,” have identified as potential 1,000% winners. But those aren’t actually stocks he recommended — he has had successful picks, of course, as have all newsletter pundits, but he’s not satisfied with those claims of gains of 355%, 634%, or even 2,539% in Sarepta Therapeutics, which is the example he keeps coming back to — he has to imply that somehow he would, using the system he’s suggesting today, also have found multi-year 1,000%+ (or even 10,000%+) winners in past years.
Always be skeptical of “my system would have found these gems back then and made you rich, if only we had discovered this fantastic system and shared it with you then” claims — identifying AMZN as a 50,000% winner in retrospect is easy, but it was far more difficult to pick it in the late 1990s, or even after the dot com crash (would you have have sold AMZN when it was dropping by 90% in 2001? If so, you missed a lot of that potential return), and it was more difficult still to stick with it for long enough to generate those absurdly high 50,000% returns. Backtesting makes fortune-making look easy — and backtesting that doesn’t include the possibility that some of the stocks that satisfy your backtest criteria probably lost 50% or 80% or 99% is disingenuous (the “system” itself uses pretty loose criteria, at least as described in the ad, so you could probably use it to claim almost anything you want).
So what are those criteria? What is it that Mampilly says he’s looking for? He says his “DNA” for stocks that are “primed to rally 1,000%” includes a few steps:
First, he says you need to find out “if the company is an industry disruptor” — here’s how he puts it:
“Finding disruptors is one of the foundational pillars of grabbing a 1,000% gain.
“This could be a new drug, new technology, a new system for doing things, a new medical device… the list is endless.
“But it has to disrupt the industry.
“And — this is key — I pay close attention to the potential market size for this disruptive company.
“If the potential market is small, the stock can only climb so much. But if it has a big potential market, the stock can easily climb 1,000%.”
That’s nothing shocking for growth investors, of course — that’s what David Gardner at the Motley Fool calls “Rule Breakers” stocks, and a lot of them fail… but the big winners do, like Amazon or Netflix or Priceline, generate staggering returns.
“Phase II is the number-crunching phase. Once I know a company is going to disrupt an industry, I need to make sure it has the potential to go up 1,000%.
“I look at a lot of numbers. Some are really basic.
“For example, I want lower-priced stocks. Generally, I look for stocks that are priced between $1 and $25. Above that, and the odds of the stock going up tenfold diminish quickly….
“I also want companies with a market cap of $150 million to $3 billion. They still have a lot of room to go up….
“I want to find companies that currently have under $3 billion in sales, while growing sales an average of 10% to 20% a year.
“At this rate, a company would double its sales within five years … something which — without fail — catapults the stock price.”
And then he says that his other key criteria is “Insider Activity” — here’s how he puts it:
“Specifically, I look at insider buying and selling.
“If the C-level executives of a company don’t own a good portion of their own stock, I don’t want to touch it. Full stop….
“Insiders need to have millions of their own dollars at stake.”
So those are the criteria — small cap stock, low-priced, insider ownership, sales growth… what, then, is the one stock he focuses on as the big buy to lure in investors? Here’s how he introduces it:
“This is the most excited I’ve been about an investment in years. I expect people will be talking about this company decades from now, just as much as they talk about Pfizer in pharmaceuticals. It has all the makings of being a mega-sized company… and just like all those companies, anyone prudent enough to be there, at the ground-floor, stands to make money hand over fist in the months ahead….
“This company is at the heart of a relatively new science … a science already disrupting one of the largest markets … health care.
“It’s called precision medicine.”
What other clues do we get? Here’s what I culled out of the ad for you:
“Early-stage firms have already reaped huge returns — like Illumina, which is up 3,000% so far.
“But the real winner is emerging at this very moment … the company I am going to share with our viewers today. This company is specifically planning to dominate the precision treatment of cancer … positioning it for the $107 billion haul for cancer treatment in the short term…
“In fact, the Swiss pharmaceutical giant Roche just invested $1 billion in this company….
“I project sales to soar 70% by the end of this year, it has a market cap under $1 billion and the stock is priced under $25….
“… in the last year, insider ownership has doubled….
“The Roche purchase woke a sleeping giant … Wall Street.
“Kleiner, Perkins, Caufield and Byers — one of the largest venture capital firms in Silicon Valley — has now taken a large stake in this firm…
“Institutional giants like BlackRock, Vanguard and Oppenheimer quickly followed.
“I expect this company could move very, very quickly. Again, small stocks mean increased volatility, so those following my recommendations should be aware of the risk, keep the buy-up-to price in mind and avoid ‘chasing the stock’ too far.”
OK, so that is a fairly easy pile to chew on for the Mighty, Mighty Thinkolator — we’ll have to use the electric start during this snowy weather, but I got it chugging along pretty nicely, shoveled the whole pile in for you, and got the answer out right quick: This is Foundation Medicine (FMI).
Foundation Medicine is indeed a “personalized medicine” stock, focused on cancer treatment, and it fits all Mampilly’s criteria — it has a market cap of about $850 million, is growing revenue at about 15%, and has a huge investment from Roche (Roche spent about a billion dollars to get a majority stake two years ago — that sent the stock flying, since Roche paid a huge premium for that controlling stake, but it fell back down starting a few months later and has spent most of the past 18 months bouncing between $15-25… it’s at the top of that range right now, and it appears to me that it’s probably Paul Mampilly’s pressure driving it up, since the stock has climbed about 25% in two days.
I don’t know whether the company’s fundamentals mean it should be trading at this $25 price, but I don’t see any fundamental change between Monday and today, and it was trading at $19 on Monday… so in these kinds of situations it’s always important to be a bit wary. Buying pressure doesn’t necessarily keep stocks moving up forever, particularly if it’s just buying pressure from a newsletter recommendation… that newsletter will move on and recommend different stocks, or the pundit might even suggest a sell at some point, you never know. Or maybe it’s the beginning of a massive blaze of enthusiasm, and the fire has just been lit — I tend on the side of skepticism after these kinds of pops, but I don’t know the stock well.
Analysts are predicting continued revenue growth for FMI, but not anything that will be in danger of tipping them over into profitability anytime soon — they’re expected to lose $3 a share when they report in about two weeks, and another $3 a share in 2017 and $2 a share in 2018 on 20%ish revenue growth. They have already pre-announced 2016 numbers, in a press release that came out on January 9 and had little to no impact on the share price, so it seems silly to count on the earnings providing a positive surprise beyond that.
And the company also noted that this year, as they transition to a new CEO, they have the following non-financially-specific outlook:
“As part of Foundation Medicine’s commitment to being a partner for the patient journey, the company expects to advance a number of key business objectives in 2017. These include: advancing its universal, pan-cancer companion diagnostic assay through the FDA and CMS parallel review process to decision and launch in the second half of 2017; broadening Medicare and third-party payer coverage for its clinical CGP products; growing clinical volume across its product portfolio, including expanded global market presence; and expanding its biopharma business, including additional companion diagnostic collaborations and SmartTrials clinical trial access programs.”
The business essentially develops and sells genetic tests (comprehensive genomic profiling, CGP). These are used both in testing patients and identifying strains of cancer, and in making assessments about which treatment is best for which variety of tumor a patient might have. That is certainly an interesting business, though I don’t know what the competition is like or whether FMI is likely to see their market share in the testing business balloon because of any specific tests they’re hoping to roll out this year.
And with that, I’ll leave you to it — it’s not a stock I’m buying, but the Roche investment is an important foundation for the shares and they do have positive trends in terms of sales and testing volume so there is a real business that is improving… whether that means it’s worth the $600 million market cap it had before Roche invested a couple years ago, or the $500 million it fell to a year ago, or the $850 million it popped to this week when it hit $25 a share, I have no idea — that’s a lot of volatility for a company whose numbers do not change all that much, and which is nowhere near profitability even with pretty solid revenue growth projected, so you’ll have to make your own call. Let us know what you think with a comment below.
P.S. On the “insider ownership” bit FMI has been hit or miss over the past few years — they do have some substantial insider ownership, though it pales compared to Roche’s giant stake, but there has not been any buying over the past six months, just the (fairly typical) steady stream of relatively small sales from insiders. Having insider owners in itself is generally “a good thing,” all else being equal, though if you’re looking for the impact on shares the only real academic research into this indicates that the only thing that indicates a stock has a better chance of rising is when multiple C-suite insiders buy shares with their own money (i.e., not just getting a grant of stock or stock options that don’t cost them anything). Having employees who buy stock is far more compelling as a “tell” for possible good things happening than having employees who are given stock as part of their compensation.