“Has Warren Buffett Gone Mad?” (Hilary Kramer)

By Travis Johnson, Stock Gumshoe, December 13, 2011

That provocative headline is there to get your attention, of course — plenty of folks disagree with Warren Buffett on one thing or another, but few believe him to be “mad.”

No, what Hilary Kramer is trying to do is to draw your attention to the fact that Buffett finally bought a tech stock, IBM (though yes, you can argue that he only bought it because it’s not really a “tech stock” anymore, it’s a consulting and services company) … and that in so doing he’s really just finally doing the smart thing like … well, like Hilary Kramer.

Here’s how she puts it:

“I don’t know if IBM’s a ten-bagger from here, but I do know this … Buffett is right to change his tune on technology stocks.

“Some of the best opportunities I’m finding in the market today are innovative companies that are capitalizing on the unstoppable, fastest growing tech trends.

“Cloud computing, mobile payments, smartphones and tablets … these amazing technological breakthroughs are still in the early stages of a massive growth curve.”

Kramer did score a nice win with her teaser recommendation to buy Motorola Mobility (MMI) earlier this year, nicely timed not long before Google announced they’d be taking MMI over at a nice premium, so she uses that as further justification that she’s got the goods when it comes to mobile telecom stocks … and that her newest recommendation is in that same sector.

What is that newest recommendation, you ask? Well, if you’d like to go cough up $200 bucks for a subscription to her GameChangers newsletter she’ll happily tell you. Go ahead, we’ll wait — and hey, it’s “on sale!”

No? OK, then let’s identify it for you using the clues she throws out in the ad, shall we? Here they are:

“… there is one thing every single smartphone on the planet has in common …

… you need to activate it.

“This company provides automated software and cloud technology that enable customers to activate their accounts and synch their devices to the Internet. Their customers are the wireless carriers and device makers, who rely on its technology to automate the activation process and content management for their subscribers’ devices.

“Their client list is a Who’s Who of the wireless, cable and technology industries… AT&T, Verizon Wireless and Vodafone; cable operators Cablevision, Charter Communications, Comcast and Time Warner Cable; and original equipment manufacturers Apple, Dell, Panasonic and Nokia.

“The company has the first and only legal solution for licensed content transfer from an old device to the new one being activated.”

Sounds interesting as a play on new smart (and dumb, I suppose) phones, and on the increasing numbers of transactions on those phones. How about some more details to help out the Thinkolator?

“Approximately 75% of revenues come from transactions, with the remainder generated from professional services and software licenses….

“… the company recently announced it will continue to play an important role in the iPhone 4S activation process and support all iPhone transactions through AT&T’s online channel….

“And talk about recession proof… since 2004 (the first year public information was available following their 2006 IPO) revenues have grown at a blistering annual rate of 35%. Profitability improved from basically breakeven in 2004 to $23 million in 2010.

“Results have stayed strong here in 2011. Through the first three quarters, revenues increased 41% thanks to increased transaction volumes from and expansion into new programs with existing partners.”

So what is this new stock that Hilary is targeting for a “quick 30% move?” Let’s see what the Thinkolator says.

Shovel in all that data, flip the switch … and a pretty quick answer spins out the other side this time, hardly any waiting at all … this teased pick is … Synchronoss (SNCR)

Remember them? They were a hot hot hot story during the early days of the iPhone, the folks who helped to enable AT&T customers to buy their phones online and activate them from home without going to a store — remember when that was a revolutionary concept? (Even though they had a few glitches in those early days.) That helped to drive SNCR to a dramatic share performance in 2007, the year the iPhone was introduced to an adoring agglomeration of acolytes. 2008 was an awful year for SNCR shares, coming back to earth from that excitement, and they rebounded a bit following the financial crisis, but they’ve basically been sitting there quietly in the back of the class for the last year or two, not doing too much.

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Analysts think SNCR will end up earning about 88 cents this year, and $1.07 or so next year, so that’s a forward PE in the high-20s — not shockingly high, but certainly a premium to the market.

Those same analysts also forecast better than 20% annual earnings growth for SNCR for the next several years, which would make the valuation seem quite reasonable — though how you can guess how much money they’ll make in three or four years, particularly given their outsize reliance on a few customers, is beyond me (I know, they make the forecasts because that’s their job — it’s just hard to put much faith in them).

And what is that “outsize reliance?” Well, to a huge degree it’s AT&T and the iPhone — SNCR gets roughly half of their revenue from activations for AT&T customers, even though their huge fall a couple years back was in part due to the loss of exclusive access to that contract, so any changes to that deal would obviously have a big impact on their earnings … and they have a couple other large customers too, including Verizon (which I own). I don’t know that there’s any trouble brewing with any of their big telecom customers, but it’s always at least a back-of-the-mind worry when your company depends on just a few customers. And when they’ve been burned before.

Synchronoss won’t next report until February, so there isn’t likely to be any earnings-related news in the near future — the have consistently beaten earnings estimates by a couple pennies for each of the last four quarters, so that’s a positive, but it’s also what you’d expect for a growth-priced company. It’s not a “high octane” grower (it’s a “B” in Navellier’s system, for example), but it is growing a bit faster than the market and it’s in a fast-growing business if they can hold on to their position in cell phone transaction processing. I don’t know what the competition in their niche might be, I’ve not heard of any companies who do exactly what they do, but I presume that there’s probably room for competition.

So what do you think? Has Kramer picked another beauty along the lines of Motorola Mobility, or is this a stinker from her stable (remember SuperMedia?). Let us know with a comment below.



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