“Great Online Advertising Play” owned by John Paulson, and “The Only Smart Way to Profit From Solar” (Hilary Kramer)

By Travis Johnson, Stock Gumshoe, September 1, 2010

I wrote about Hilary Kramer and her new(ish) GameChangers newsletter for the first time just a couple weeks ago — so it’s certainly too early to judge whether her teaser stocks tend to perform as she predicts (that pick, Metalico, is down about 10% from when I wrote about it … but I don’t hold a grudge, of course, and it was a tough August for the broader markets, too).

But we can keep sniffing out here heavily hyped ideas, at least — and making some snarky comments.

So … let’s start with the snarkiness, shall we? Her latest ad takes credit for making her readers a 25% return on shares of Tesla (TSLA), the electric car maker that IPO’d about two months ago. Which would have been a very tricky feat, indeed — she did say in an email on June 29, the day of the IPO, that she advised buying shares of TSLA up to $23.50, which you could have done on the next day if you were quick. June 30 was when the shares shot up briefly to $30 in the post-IPO mania, but the stock also dipped to $23.30 that day … and the following trading day (July 1), if you were a little more patient and had that limit order in for a bit under $23.50, you could have picked up shares even cheaper — maybe as low as $20.27 … or at the very least, for the closing price of $21.97, still well under that “buy up to” price of $23.50.

Here’s how she put it in her email on June 29, after saying that a potential buyout in a year could get the stock to $75 …

“But even if I’m wrong about a take over, and these guys succeed in going it alone (and if anyone can do that, it’s Tesla Chairman Elon Musk), yesterday’s bear-beating performance, and all the buzz around this stock shows that it’s got a real shot at $40, and a quick 70% profit before year-end. That is why I am recommending all investors take a small stake in Tesla (NASDAQ: TSLA) at $23.50/share or less.”

So you buy the stock, let’s be charitable and say that it took you a day or so to get around to reading the email, and you see the volatility so you peg an even lower limit price than she suggested, and you get your shares for, say, $21. You’re pretty excited, right? Looking forward to that “quick 70% profit” as the stock goes to $40 before the end of the year?

Well, then you would have been quite surprised to see that, a couple months later (that is, last night), Kramer sends out another email saying “Sell Tesla Now.”

And it’s not just that she says to sell it now after predicting such great gains in a few months, or dramatic gains in a year … it’s that she says to sell Tesla now (it’s currently trading for just about $20) AND she claims that she’s up 25%, when we know that at no time on the two days after that June 29 email did the stock get as low as it is right now.

So how did she book this 25% profit? Well, she’s still saying, to her credit, that she was urging you to buy at $23.50 or less.

But then she says that …

“I hope you took that advice.

If you did, you bagged a fast 25% gain in just seven weeks.

Today I’m here to tell you it’s time to cut Tesla loose and put those gains to work in my new #1 energy play.”

Huh? How do you go from $23.50 down to $20 and claim a 25% gain? Well, part of the answer to that is in the dates — she’s now saying that she gave you this “buy under $23.50” suggestion seven weeks ago, though that first email I saw from her on this was on the day of the IPO, June 29, and that was nine weeks ago.

And it turns out that if you had ignored her advice at the time, then come back to it two weeks later, you still couldn’t have made 25% from the shares. The only way to book a gain like that on this stock so far would be if you had bought very near the absolute lows, when it dipped a few days after the IPO, and sold it at at least $20. That second week of the trading for this newly public stock, after the July 4 holiday, was when the lows were put in — it got down to $14.98 at one point on July 7. And if we go by closing prices, we could assume that maybe you were very prescient, you saw the big dip coming, and you got your shares at $15.80, the lowest closing price the shares have registered so far.

If you had done that and sold this morning at $20, yes, you could book a 25% gain (that’s a gain of $4.20, which is slightly more than 25% of $15.80 — you could have even paid as much as $16 for the shares and still gotten a 25% return by selling today). Of course, that was also more than her stated “seven weeks ago” — that was eight weeks ago, if you had waited another week the dip would have been over (at least temporarily — I’d bet Tesla will see those low teens again) and you would have probably paid about $18 for the shares.

But of course, buying anywhere near her recommended “buy up to” price of $23.50 would have meant you broke even in the best scenario, and more likely lost 10-15%.

I shouldn’t pick on her personally for this, since cherry-picking returns based on historic low prices is common. Of more concern to me, were I a subscriber, would be the fact that she reportedly urged her readers to buy this as speculation on a 6-12 month time frame … and then, with prices quite close still to the IPO price, she just tells them to sell? Sure, Tesla released numbers that were a bit worse than expected about a month after they went public — but it’s not like anyone expected them to make money … and those who are speculating in the stock now are still betting on the same stuff, a deal with Toyota to produce cars, the mass market sedan they’re trying to prep for 2012, and, probably, a big partnership or buyout to make it feasible for them to actually do all the stuff they say they’re going to do.

In the email saying that she wanted you to sell the stock, she said that “Tesla is an exciting company in the right sector (electric cars), but it faces stiff resistance from deep-pocketed competitors, and is selling a VERY high-end product in the midst of what still feels like a recession to most consumers.”

Buying an IPO during the first few months is almost always crap shoot, why suggest that people buy shares right after the bump up on the IPO, and then, with the stock still essentially flat, not have them hold on to find out if they’re going to roll a seven? I wouldn’t have bought Tesla in the first place, and don’t have any interest in it now, but it’s still basically the same company, with the same story, at the same price.

So … enough snarkiness about Tesla and Kramer … assuming you still wish to hear about one of her favorite picks, what is she teasing in this latest email?

“The Only Smart Way to Profit From Solar

“Lots of alternative energy solutions are simply not ready for prime time (or your investment dollars). Solar power companies might be a green tech darling, but for individual investors like you, they’re no place for your money right now.

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“Instead, profit from the continued push to make solar affordable and more widely used by investing in the company behind the one component that EVERY solar manufacturer needs.

“Surprisingly, it comes from a tech titan that made fortunes for many investors during the 90s technology run-up. This granddaddy of the technology industry has reinvented itself as a major player in alternative energy.”

Well, that sound more promising — a survivor of a company that’s profiting from solar companies, but not actually doing the solar hype itself? What else are we told about them?

“…. it still provides critical manufacturing equipment to tech companies like Intel, but that?s only one piece of its business now.

“The company developed game-changing technology that is the world’s only technology of its kind—and is used by buy solar companies around the globe. Better yet, they recently announced a new breakthrough that reduces their customers’ material costs 22%, cementing their position as the dominant supplier.”

And she gives a few metrics to help your friendly neighborhood Stock Gumshoe dig into the details a bit: They apparently have $3.7 billion in cash, and a $1 billion R&D budget. And she says they have a “major role in the high-growth flat panel monitor and TV business.”

So who is this mysterious company? Well, she’s right — this is a former tech darling, today she’s teasing:

Applied Materials (AMAT)

You have to add their receivables to get the balance sheet up to $3.7 billion in “cash”, but they do report about $2.1 billion in what I’d call “real” net cash (net cash minus debt), still a lot — and their R&D budget has been about a billion dollars a year for several years, though that line item dipped slightly under that number last year.

And believe it or not, like Intel (INTC), AMAT now pays a decent and growing dividend (2.7% for AMAT, 3.5% for INTC), who would have thought that companies like these guys and Microsoft (MSFT — 2.2%) would end up paying a dividend that outpaces the S&P 500? Big tech is the new dividend growth stalwart sector, it appears.

Applied Materials is a stock you probably already have at least heard of, and can at least research fairly easily — analyst think they’re in a solid recovery now, in part because of demand for the semiconductor manufacturing equipment they specialize in and in part because of their newer lines of machinery for flat panel TVs and solar panels, so the forward guesses have them earning 91 cents per share this year and $1.28 next year (this year ends in October for them, so 3/4 of it is already known).

That gives the shares a current year PE of about 11 (again, 3/4 of those earnings are already in the books, though the final piece of that puzzle won’t be known until mid-November when they release their fourth quarter) and a forward estimated PE of about 8, and analyst estimates that have been trending upward since the last earnings release, which is usually a good sign. Not bad for an old techie — and they’re still pretty big, with a market cap of about $14 billion and a whole mess of analysts following the stock, so they’re not exactly flying under the radar.

Finally, as a little bonus, in last night’s email she tells us that she has “3 innovative gamechangers” and that “at least one will double by Labor Day.” I’m not sure if anyone remembered to tell her copywriter that labor day is now less than a week away … or maybe they mean next Labor Day… or they really are this excited about these stocks. She doesn’t provide much in the way of clues for these three picks, but one of them caught my eye because of the name dropping, so let’s have a look:

“There’s also a great online advertising play that has been largely missed by the Wall Street herd. This company will be a winner if the economic recovery starts to take hold, but will win even bigger if times stay tough! The stock sells for under $20 right now, but as the story gets out, I fully expect it to touch $50. And I’m not alone in this belief… the stock’s single largest individual shareholder is legendary Wall Street contrarian John Paulson, the person who single-handedly made billions as the mortgage market melted down in 2008.”

OK … well, the only stock that comes close to matching that profile is SuperMedia (SPMD), the publisher of yellow pages directories and their online cousins — this used to be Idearc, which was spun off as the yellow pages division of Verizon, but Idearc went bankrupt last year and canceled out its common stock … and this SuperMedia is the new company, owned by those creditors and floated back on the market early this year.

Paulson invested in this new equity before it existed, while they were still in restructuring — I have no idea what terms he got for this purchase offer, whether he also holds SuperMedia debt, or if he’s still happy with those terms, but it was certainly a better offer than any individual investors would have gotten at the time. SPMD went public again in January to great fanfare and excitement, with the stock at about $40 per share — and yes, about a month ago you might have been exited to see it “under $20,” but now, after a tough August, you can buy the shares for “under $10.”

SPMD carries a ridiculous trailing PE of .09, but that’s obviously a silly relic of the bankruptcy filing — the forward PE is estimated at about 5, but I’d have a hard time taking that estimate seriously. They believe that their online advertising segment will be a growth industry, and maybe it will be, but they still carry $2.75 billion in debt from the restructuring and have falling overall sales according to Yahoo Finance, and that’s a tough nut to crack for a stock that has an equity value now (market cap) of just about $140 million.

If they can pay their debt service (no idea what the terms are), they might well survive for a good long time, but I’d think that most companies with that kind of balance sheet would be assumed to be on the verge of going bankrupt (again, in this case). Paulson & Co does reportedly own by far the biggest chunk of outstanding shares (2.6 million as of the last filing with the SEC, which was for his June 30 holdings), though those shares are worth about half what they were two months ago — and of course, even at that June 30 valuation of near $50 million it’s a tiny drop in Paulson’s bucket.

In my opinion, the only reason to invest in a yellow pages company is if you’re pretty confident that the company is going to pay out solid dividends as its high-margin directory business slowly dies — the talk about growth in online advertising for yellow pages company has so far yielded impressive-sounding sales growth from very low levels, but dramatically lower profit margins than the old line directory business. There are many folks who believe wholeheartedly in the power of the old directory businesses to dominate local advertising, thanks to their local salespeople and established relationships with local businesses … but I don’t buy it, or at least I don’t buy that they’ll do so with nearly the same profits they’ve enjoyed from their phone books.

Unfortunately, the last two high-yield US yellow pages companies, Idearc and R.H. Donnely, have now both gone bankrupt, so the plan to suck a nice big yield out of those stocks for a few years didn’t work so well (though Verizon’s plan to spin off Idearc seemed to come just in time), and I can’t imagine that SuperMedia’s creditors will let them pay out fat dividends anytime soon. That leaves just one stock in North America that’s still testing that strategy (as far as I know, at least), the Yellow Pages Income Fund in Canada (YLWPF on the pink sheets) — that one has been a favorite of Canadian trust enthusiast Roger Conrad for ages and I’ve written about it before if you’re curious … I still wouldn’t personally buy that one, but I sure like it a lot better than SuperMedia.

Might need to make that into a new Stock Gumshoe maxim: “If it’s in a dying business, it better pay a big ‘ol dividend… and here’s hoping it dies slowly.”

So whaddya think? That’s a lot of Gumshoe blather to sit through for one day, have any opinion to share about Tesla, Applied Materials or SuperMedia? Let ’em fly with a comment below!

Full disclosure: I own shares of Verizon and Google personally, but have no direct interest in any other companies mentioned above. I will not trade in any stock mentioned for at least three days.