“The Almost Perfect Stock” (Cloud Computing)

By Travis Johnson, Stock Gumshoe, August 4, 2010

Well, it appears the secret’s out on how to get the Gumshoe’s attention: It’s not enough to have a hype-filled ad that promises huge gains, the ones that float to the top of my to-do list often also have perfect, pithy headlines like the one I’ve quoted above: who can resist “The Almost Perfect Stock?”

Not me.

Even if it is, again, from Louis Navellier, and I’ve arguably written too much about him already in recent weeks. But this ad focuses on a cloud computing company, and I’ve also gotten so many questions about the Motley Fools indefatigable cloud computing ad recently that this gives me a quick opportunity to remind you about those stocks, too, at a time when so many folks are talking about big-cap tech stocks and the relatively inexpensive growth opportunity that so many of them represent.

The Motley Fool’s take on cloud computing has been covered many times in this space, though not as many times as it’s been rehashed by the Fool marketers — it’s generally sold to us as the “kings of cloud computing” or the “words that Bill Gates doesn’t want you to hear,” I won’t go through it all again but the original few runs of this ad teased (or touted — sometimes they revealed some of the names in the ads) VMWare (VMW), Akamai (AKAM), and Google (GOOG). More recent ads have teased this by saying that “a 118-year-old technology is about to bring Microsoft to its knees…” which is basically just a repeat of the same stuff but uses the comparison of cloud computing/software as service companies to utilities (the 118 year old stuff refers to electric utilities and the building of the power grid.

And they also add on a tease about “Cloud Computing 2.0”, which still touts the same companies but also throws two other “under the radar” ideas on the table, including Salesforce.com (CRM) (the other one doesn’t get any hints so I haven’t looked into what it might be).

So that’s a quick refresher, and a reminder that several newsletters are very actively touting “cloud computing” stocks of one stripe or another … but also that some of them have been doing so for upwards of two years, so we should pause for a quick skepticism break when they tell us that this week is the key buying opportunity that you don’t want to miss (if only because, naturally, they’ve made the same claims each time similar ads were mailed).

But today we’re not just looking at some old Motley Fool ideas, we’re looking into Louis Navellier’s new (as far as I know) idea that he calls “the almost perfect stock.” So what is it? Well, we know it’s in cloud computing … but of course, he also throws in a nice little passel ‘o clues:

“Imagine… a technology company whose product you don’t install, that reduces business costs by billions a year, and that end users can access with the click of the mouse.

“…a company whose revenues jumped 48% and whose earnings soared 128% last quarter—ALL while handing investors 130% 12-month gains.

“So what, exactly, is the flaw here?

“99 out of 100 investors have never heard of it and yet it’s transforming the computing world just as Microsoft and Intel did before it.”

Of course, the “99 out of 100” is rarely true for Navellier picks, especially for his Blue Chip Growth newsletter, since that tends to focus on buying large cap momentum growth stocks — which also tend to be the most well-known stocks among individual investors (like Intuitiive Surgical, Apple, Microsoft, etc.). Then again, I’m sure he could make that stat true if he picked the right 100 investors, so we won’t quibble.

How about some more clues about which stock is “almost perfect” and “set to double investors money again?”

“this company’s breakthrough technology works behind the scenes on the Internet. As a result, end users like you and me don’t need to buy or install it.

We use it “on the go” with a few clicks of a mouse, no differently from using Yahoo mail, Google mail, YouTube, Facebook, Paypal, eBay and the like.

The multibillion-dollar businesses that are employing this company’s technology are making out like bandits by not only reducing their customers’ software and hardware costs but also by delivering better service as well.

“…its customer list looks like the who’s who of the world’s largest companies, including …

* 100% of the Fortune 100
* 98% of the Fortune (that’s 491 out of 500)
* 96% of the Fortune (that’s 995 out of 1000)”

So that’s pretty good. But we always want more — another clue or two, please?

“I’m not the only one who seeks the mammoth profit potential here.

“In the past three months, the analyst community also has revised its consensus earnings estimate 15% higher for the company. This hasn’t gone unnoticed by mutual funds and institutional investors who have simply loaded up on this stock for the long haul.

“• UBS Global Assets 6.4 million shares
• FMR LLC 6.4 million shares
• Sands Capital 3.2 million shares
• Morgan Stanley 2.4 million shares
• Fidelity Growth 2.2 million shares
• Vanguard Morgan 1.1 million shares”

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So … we can issue the same rejoinder here that almost always comes to mind when a teasermeister touts the institutional holders who have millions of shares and are “in it for the long haul:” There’s no way for Navellier to know how long these institutions will hold the shares, and any stock with a market cap of over a billion dollars is going to have a similar list of familiar-sounding institutions who each own millions of shares — unless you’re specifically trying to follow the portfolio of the Fidelity Growth mutual fund, for example, this isn’t terribly meaningful … and even if that’s the case with you, this institutional ownership data is almost always at least a few months old.

But anyway, even if it doesn’t mean much it does help us confirm the result of our sleuthing …

… and I hate to break it to you, but you’re not one of the “99 out of 100” investors who hasn’t heard of this one.

How do I know? Because I mentioned it a few paragraphs ago as an old Motley Fool pick: This is VMWare (VMW)

VMWare, in case you were one of those 99/100 folks before today, is a company that was spun out of EMC (and is still partly owned by them — EMC is often teased as a “back door” into VMWare as well, though it’s a bit larger and is primarily a storage company). Their specialty is making virtualization software, the server-management software (that might be the wrong term) that allows for more effective use of servers, letting one server perform virtually as a fleet of servers in order to maximize efficiency.

And though this one might be “almost perfect” as a cloud computing play (and it has been touted as such by everyone up to and including Jim Cramer), many investors might find that the “almost” part is because the stock is … well, we’ll be generous and say it’s a bit expensive. The other concern that you’ll typically hear is that their leadership of this sector is, as you might expect, under constant attack — they area pioneer of virtualization, and they certainly seem to be the leader in this business, but I’m sure at least some investors must be concerned that when your potential competitors are IBM, Cisco, Microsoft, Red Hat, and almost every big server, storage, and software company, it’s important not to rest on your laurels.

I won’t argue against VMWare as a company or as a leader, and the momentum is behind them — but I find it hard to buy momentum stocks, every time I do so I’m fighting a little voice in the back of my head that says “they’re trading for 50X next year’s earnings, are you crazy?”

That voice makes me miss out on most of the big momentum plays, as this stock has been most of the time since the shares were spun out a couple years ago (it did get cheap for a while during the economic collapse … but of course, I wasn’t paying attention to it at the time, and it’s been almost straight up since then). And of course, momentum growth stocks almost always look expensive — VMWare looked expensive at $50 six months ago, which didn’t stop the shares from going to $80.

And though Navellier says you’ve got to be a Blue Chip Growth subscriber to get all the details, you don’t even have to be a Gumshoe reader this time around to get the quick scoop (forget you heard that: you MUST read Stock Gumshoe every day!) — he did write about this one in a free article about a week ago that I didn’t notice until now, in that article he called this one “conservative” and gave a “buy up to” price of $78 … so it’s perhaps a touch too expensive even for Louis today at $81, unless he’s changed his mind.

More importantly: It’s your money, so what do you think? Interested in cloud computing as an investment theme? Think that VMWare is the way to go, or would you rather jump aboard Akamai, Google, Salesforce.com or one of the other players in the clouds? Let us know with a comment below.

Full disclosure: I currently own shares of Google, and I profiled Akamai for the Irregulars about a year ago. I do not have any interest in any other stock mentioned, and will not trade in the shares of any company I write about for at least three days.



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john l
john l
August 4, 2010 6:00 pm

The cheaper way to buy VMW is to buy EMC. EMC is the majority shareholder of VMW.

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Ron S
Ron S
August 4, 2010 10:16 pm

I am a new subscriber who just joined yesterday. Got to say this is way cool. FYI AKAM has been touted by at least two people on CNBC's Fast Money since it sold off last week. I sold front month, out of the money put options on both VMW and AKAM earlier this week.

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Daniel Victor
Daniel Victor
August 5, 2010 1:19 am

If that cloud computing stock is expensive,does that make it a blue sky stock ?

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August 5, 2010 1:48 am

it's sort of funny to see non-tech folks talk about tech stocks… vmw has it's own problems and had its hay days several years back… time has caught up with them now.. the run is over…

August 5, 2010 6:03 am