A Fool-ish Guess: Teased “Rare Recent IPO Buy Alert” from Tom Gardner

by Travis Johnson, Stock Gumshoe | December 18, 2017 5:27 pm

What's the latest Motley Fool Stock Advisor pick being teased?

I usually get quite a few questions about teaser pitches from the Motley Fool[1], and this one is no different… but what does make it a bit different is the paucity of clues.

So we’re going to do some guessing this time out. Buckle your seatbelts!

The pitch is for Motley Fool Stock Advisor[2], their “flagship” newsletter that features picks from Fool founding brothers Tom and David Gardner[3] in each issue, and it’s Tom’s pick that they’re dangling as bait for our subscription dollars. Here’s what they note in the pitch:

“Yesterday our CEO, Tom Gardner[4], unveiled his latest stock pick – and his confidence about this one is through the ROOF!

“In fact, he is so confident that he has invested money from his own pocket in the company!”

The Fool does that quite a bit — unlike some newsletter publishers, the editors and employees own stocks that they write about (though they do disclose it, which is good), and the Motley Fool itself also owns stocks in corporate portfolios. I’m not giving them a hard time, incidentally, I think newsletter writers should own stocks and shouldn’t have to choose between owning a stock that they like and writing about it… though there should certainly be trading restrictions that keep employees from trading the “pop” that any newsletter recommendation might have. (That’s the policy here at Stock Gumshoe — writers can own the stock that they write about, but must disclose that… and they cannot trade that stock for at least three days, which should be enough time for a little “pop” to deflate with our relatively small readership.)

But I digress… what’s the story this time? It’s a recent IPO[5], much like, they say, brother Dave’s recommendation of Match (MTCH) last year[6]… here are the few clues we get:

“… this company only had their IPO 6 months ago….

“Just last month, this small (for now) company ended their “lock-up period.” And insiders are now able to sell shares in the open market.

“And while that can initially cause share prices to drop – we believe that temporary lull is about to end.

“And since this ‘IPO lock-up lull’ only happens once in a company’s life… this could be the lowest we ever see their stock!”

And one final clue, which might be the most useful one of all:

“Tom only unveiled this latest pick to Stock Advisor members yesterday! Which means the stock market was only open for 4 hours after it came out.”

So who is it? This is, sez the Thinkolator (with less certainty than we usually like), Appian (APPN)[7].

Why? Well, it did go public a bit over six months ago… the shares did dip on the lockup expiration a bit, it seems… and, most compellingly, the stock is soaring today on the back of that recommendation to a few hundred thousand of Tom Gardner’s closest buds (Stock Advisor is the Fool’s least expensive letter, and has by far the largest circulation, at 268,000+ last time I saw their list data). Certainly enough to make a small cap stock like Appian go bonkers, and bonkers it did — a 5% jump at Noon yesterday, and a further 20%+ today.

Has there been other news, or other reason for this stock to jump? Perhaps, but I didn’t see it. They’ve gotten a little bit of additional purchasing by the largest (by far) institutional shareholder, Abdiel Capital Advisors, so that fund now owns more than half of the company… and I don’t know anything about them, but it’s a concentrated hedge fund that says it uses a “value” investing strategy. I haven’t checked to see whether they were also pre-IPO investors in Appian, but they have built at least half of their position since the IPO with a record of pretty aggressive buying over the past six months.

So that’s an odd part of the story that I’d want to understand a bit better — if the data in Yahoo[8] Finance is accurate, then Abdiel over the past few months has bought more than half of the shares of this fairly small ($1+ billion market cap) company… which is decidedly unusual. And insiders did do additional selling once that lockup period expired, but not Abdiel, they kept buying… so the executives who should know the company best own hardly any shares at all, and the pre-IPO shareholders seem to have sold their shares hand over fist, but this hedge fund is a huge shareholder and buying more. That’s worth putting in some time to understand, I expect.

Appian is an interesting company, though I don’t understand the product particularly well — they offer a platform for easier software/app development for enterprise customers, essentially cutting down on the amount of coding required to develop custom apps for business processes, allowing for faster implementation.

The reason to buy Appian is the growth, as you might imagine, and it’s a subscription-service model, with extremely good customer retention and some encouraging signs that they can expand into new industries and keep growing (they were heavily reliant on financial services companies, and have now expanded aggressively into healthcare[9] and pharmaceutical companies)… but they are, of course, priced for the future. They aren’t profitable and likely won’t be profitable in the next couple years, though the sales growth is strong and the price/sales ratio is not completely ludicrous. You can see the basics of their current financials here[10] in their last quarterly presentation.

So… it’s an interesting one, I’d like to know what that hedge fund is up to with its controlling stake, and I’d want to research the company a bit more, but high growth in subscription revenue and strong customer retention and growth in new customers are all appealing, and software-as-a-service companies that can attract new customers and keep existing customers happy and spending more each year can get really rapid exponential growth once they reach an inflection point where the revenue comes in dramatically faster than they can spend it on R&D and salespeople. I don’t know where that point comes, and hadn’t heard of this stock before today, but it’s an appealing starting point… even if it’s a bit hard to take the stock seriously on the day that it instantly becomes 25% more expensive (if it’s any consolation, the stock is still below the all-time high in late September).

And perhaps one of you out there in Gumshoe-land knows a bit about our friend Appian… maybe you’ve researched them before, maybe you’ve used the product? Please do help make us all a little wiser by sharing your thoughts with a comment below. Thanks for reading!

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