Solving Fool’s “Betting $523,059.77 on Tom’s top pick for 2019” teaser

Checking out the first wave of "best stock for 2019!" teaser pitches...

By Travis Johnson, Stock Gumshoe, January 7, 2019

It’s the beginning of the year, and that means we’re going to see lots and lots of “top stock for 2019” pitches — so, naturally, your friendly neighborhood Stock Gumshoe will be trying to solve ’em for you.

There are two that caught my eye this Monday morning, the first was Alexander Green’s “No. 1 Stock for 2019” in ads for the Oxford Club — but that one turned out to be yet another slight variation of the “$3 stock trading under a secret name” pitch they’ve been running for six months about the “son of a police officer” who is ready to “shock the world” and provide you with a “single stock retirement”… so no need to write about that one, we’ve covered that same ad before and you can see our coverage here.

But the other one wasn’t immediately obvious, so I decided to dig a little deeper — this one’s from Tom Gardner at the Motley Fool, one of the founding Fool brothers who supplies half of the picks for their Stock Advisor service (brother David, the more “growthy” of the two, supplies the other half), the stock in question is teased as “Tom’s top pick for 2019,” available in a special report for those who subscribe to Stock Advisor ($99/yr).

Here’s the top part of the ad that caught our eye:

“We’re betting $523,059.77 on Tom’s top pick for 2019

“We have more than half a million dollars of our company’s money at risk in Tom Gardner’s top stock to start 2019…

“Some members have more than doubled their money thanks to our recommendations of this stock, but we see an even bigger potential fortune ahead….”

And what other clues do we get about this one?

“It has been recommended 25 times across 10 different Motley Fool services

“$523,059.77 of The Motley Fool’s cash is at stake

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“It’s up 283% since its 2014 IPO”

And, thankfully, they include a graph of the stock’s performance since the IPO — which usually helps us confirm the Thinkolator’s answer.

I must confess that I didn’t even realize there were 10 different Motley Fool services, but when I went to look it up they currently advertise 10 on their website, which doesn’t include some services we’ve covered before like their newer Marijuana newsletter… so I guess that means pretty much all the “regular” stock investing services they publish have recommended this stock.

Thankfully, though, they’re selling the cheap one — Stock Advisor is their entry level newsletter and usually the cheapest one they publish, so they’re not pitching the “upgrade” to one of their fancier products or packages that sell for anywhere from $999 to $8,500 a year. So that’s something.

So what’s the stock? Well, that’s not a lot of clues for the Thinkolator to chew on, but we do still have an answer for you: This is (again) Arista Networks (ANET), the emerging competitor to Cisco that provides a software-based switch operating system for cloud networks (that’s an oversimplification, but that’s how I like to imagine the business — they do sell hardware that competes with high-end Cisco stuff, but it’s the EOS architecture/software that differentiates their hardware and services).

And yes, though the other clues are a little skimpy, and mean we had to reference older teaser pitches for this same stock that we’ve covered to get a lead, we can confirm that the stock chart matches… this is definitely the pick. Here’s what ANET’s shares have done since the IPO, for what it’s worth:

ANET Chart

So it’s been a nice run for Arista, mostly in 2017 (the Fool’s first big promo that we saw for this stock was in September of 2017, so they probably missed most of that run… but the stock is still up a bit, if the first teaser we covered was accurate the stock was around $180 the first time they touted it).

Back in the Fall of 2017 the Fool was “betting” $280,240.56 on the stock, and when I last looked into a Fool pitch in the Fall of 2018 the number was $523,111… so I’m not sure why that bumped down to 523,059.77 this time around. Probably they just got more accurate… or perhaps they’re just claiming that the current value of their holding, not their cost basis, is the size of the “bet.” Still, that’s close enough for some extra confirmation (which we don’t need, since a stock chart ought to be about as unique as a fingerprint… but, well, sometimes I like to wear a belt and suspenders).

And this is a stock I’ve been watching personally, too, and finally began to nibble on last last year as it was falling… so it has fallen through my cost basis, though it’s a tiny holding so far and I’m likely to keep adding as it drops. Should I add some today?

Let’s see what’s going on with ANET now… the basic situation is that Arista Networks has a very expensive stock, but has had some phenomenal growth to justify the expense. Last year, both revenue growth and earnings growth rates came down substantially from the 2017 highs that spurred the first crazy surge in ANET shares… but it’s still growing revenue most recently at 28% year over year, and earnings per share at 22% (that earnings growth looks tepid, but it’s partly because the earnings a year ago were so high — the average earnings growth over the past three years is about 60%).

The stock did get a bit of a boost today, though that’s being credited not to Tom Gardner but to Morgan Stanley boosting it to “overweight.” There won’t be any big news until next month, most likely, since they don’t report their fourth quarter until February 15. Analysts are expecting the growth to continue to moderate — they see ANET finishing 2018 with $7.76 in earnings per share, followed by $8.89 in 2019 and $10.35 in 2020. So that’s 33% earnings growth over the next two years, averaging out to something like mid-teens annual growth.

That’s pretty good, and you can make a case for paying 24X forward earnings for a stock that’s growing earnings at 16% a year… that’s a PEG ratio of about 1.5, which is firmly in the “reasonable” camp most of the time — but it’s certainly not as exciting as 60% growth, so you can see why some of the bloom came off the rose as the market for high-growth stocks fell apart late last year.

(That’s not completely fair — PEG ratio is generally calculated as the forward PE ratio divided by 5-year average annual earnings growth rate estimates, and I’m just using two-year estimates, but that’s all I’ve got at hand at the moment… by way of comparison, Ed Yardeni currently notes that the S&P PEG ratio has fallen below 1.0 for the first time since 2011, and has averaged about 1.25 over the past 20 years or so… the tech sector has a PEG of about 1.0 right now, near a five-year low).

If you’re cautious about the future, stocks that trade for close to 30X trailing earnings are scary (normalized earnings over the past four quarters came in at $7.11, so at $212 the trailing PE is 30) — and everyone seems to be cautious about the future right now.

But there’s something to be said for a massive secular growth wave, even if it feels like the broader market might be coughing for oxygen a little bit — and cloud computing and data centers in general are still in a huge growth wave, thanks to the constantly expanding avalanche of data that rushes at all of us, every moment of every day. And that’s big picture growth, which spurs more demand for the equipment that powers the innards of the internet and causes new data centers to be built and old ones to be constantly upgraded, seems like to only be accelerated by 5G adoption (next-generation wireless) that will bring more demand for more data transmission.

I don’t think the end market is going to stop growing or stop upgrading anytime soon, and Arista is still very small compared to the size of the market — and while their market share is climbing, it’s still in the single digits and the gross margin and operating margin don’t show any sign of declining, which indicates to me that there isn’t any worrisome price competition at the moment.

So yes, I’ll add a little more to this position now as we rev up for another year. This remains a small holding in the Real Money Portfolio, but now it’s a little bigger than it was when I first opened the position a month ago.

The Fool tends to cover its favorite picks with lots of free articles, as well… so there’s a lot to read from other Fool writers about ANET if you’d like, including this note following the last earnings release (they beat estimates again, as they have every quarter for years), and this one comparing ANET to CSCO just last week. The transcript from their latest conference call is here (presentation slides here).

And that’s just the work of the Thinkolator and some opining from yours truly, so that’s what I’m doing with my money… but with your money, of course, it’s your opinion that matters. Whaddya think? Ready to jump in on ANET after it has slowed down and grown into its valuation a bit over the last year? Still too expensive? Think they’ll get clobbered by Cisco in the end? We’d love to know what you think, so please share with a comment below… thanks for reading!


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Jeff Olsen
Guest
Jeff Olsen

I ‘d sure like to find out what the Fool’s top pick is for pot stocks. They are touting a Canadian company , I believe. Thanks for your wonderful service and insight. I’ll be I speak for a lot of your readers with this comment!

Peter Z
Guest
Peter Z

Maybe IMLFF ?

Nancy
Guest
Nancy

I own that. Not the worst or best! Still in infant stage ! Would do a lot of research before sinking more than about low hundreds in it! I bought at 58 cents in early October!
Good cautious success! Nancy

Josh
Guest
Josh

Canopy Growth Corporation

777stock777
Member
👍41
777stock777

If beta’s volatility were to settle down, perhaps.

Sital Johal
Guest
Sital Johal

Travis,
You are the best man! Just curious if you have ever covered Alteryx (AYX). If not, then any thoughts.

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Tom M
Guest
Tom M

Out of that $500k and change, I’ll bet the 77 cents on this one.

Nigel
Guest
Nigel

Thanks for this Travis. I look at the PE and personally think 25 would be about the right price so stock may trend toward $175 IMHO

RampageKy
Member
👍69

I get that data centers are a huge growth area, but I don’t have any idea if Arista or Cisco or Whoever Networks or ABC Systems has an easily defendable competitive advantage. Is there another way to evaluate that without understanding the technology?

safetynames
Member
👍9
safetynames

I think a big one you’re forgetting here is AWS. They are by far the largest/ fastest growing cloud services platform (read: datacenter) at the moment. They’re cleaning up behind everybody (and I suspect behind Arista as well).

Doug DeLaMatter
Guest
Doug DeLaMatter

Hey Travis, as the New Year starts, I wonder if you have any thoughts about the potential effect of Brexit on markets generally. Should we be saving our cash for a “buying opportunity” in March when it is scheduled to happen (or not happen)?
For context, my 40 yr old daughter who lives and works in London UK, already has her plane ticket bought to come home 4 days before the Brexit deadline. So SHE is taking it very seriously.

Peter
Member
👍29
Peter

I voted in the original referendum on Britain’s entry to the European Common Market in 1975 and I voted for entry. I now realize what a con job it was. Britain will thrive if it gets out of the EU. If it doesn’t it’ll implode with the rest of Europe.

Britain’s economic growth rate grew from the 1950s to its highest level in 1973. It’s declined ever since.

blairgowrie
Irregular
👍14
blairgowrie

Blairgowrie Hi Peter: I had left the UK (due to the 3 day working week caused by the miners’ strike) but would have voted against entry. Successful Partnerships demand substance that was totally lacking – thus it was no surprise that the Union would eventually fracture. The freedom of movement by members of the Union without documentation was something I felt must ultimately lead to chaos. Not unlike the media here in the US there is so much fake information being spewed out about the need to have a second vote. At what point do the Remainers accept the basic… Read more »

Farther Racher
Guest
Farther Racher

Brits too arrogant to stay. No con job.

Paul
Guest
Paul

NSX and NSX-T from VMware are also software routers for data centers. Given that this is a mature product that scared the crap out of Cisco a few years back when VMware bought Nicira Networks to get it, I’m very curious what ANET brings to the table.

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Britt
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Britt

Late to this one, behind in my email. Thought I would add in four other stocks that are supposedly Tom Gardner’s top holdings to start 2019: Facebook FB, Mastercard MA, Shopify SHOP, and Markel MKL.

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MICHAEL
Guest
MICHAEL

HI TRAVIS… I HAVE ABOUT $500 TO TAKE A CHANCE ON A PENNY STOCK. FROM WHAT I READ ON THE INVERNET PENNY POT STOCKS ARE THE WAY TO GO.. ANY UNDER A $1.00 POT STCK YOU KNOW ABOUT… I DONT MIND LOOSING THE $500.. I KNOW PENNY STOCKS ARE A GAMBLE… THANKS, MICHAEL

hunter007
Member
👍90

Michael, be cautious when buying Penny Stocks. A majority of them show no financials and aren’t regulated the same way as, say something like AAPL. Also, just because you buy it, doesn’t necessarily mean you can sell when you want to, because of the volume the stock has at that time. Lots of trickery in Penny Stocks. Caveat Emptor.

One very good thing you have stumbled upon is Stock Gumshoe and Travis. We as a community are extremely fortunate to have a service like this.

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JohnGone
Guest
JohnGone

Thank you Travis. I was intrigued by MF’s promo, and the very specific large dollar amount touted. I am a sucker for these promos and I need your ‘good angl ‘ voice on my shoulder to help keep from making foolish errors.

ARISTA sounds like an ok bet, but it kind of feels like the invitation is arriving after the party has already started. Radar on. Thanks again.
HNY to the Gumshoe. .

Nancy
Guest
Nancy

Wow counting on a lot of upward movement! Looks like it is low midpoint in the typical stock crude 3 phase development cycle! Market saturation a worry? I.E. Looks like I-Phones have hit a market cycle innovation wall! Or some sort of factor creating a market volume wall! Price barrier they say in China for those who still desire them, versus buying cheaper similar “appliances!” Since to this stock dunce it seems like they are like a washer! They wash clothes, do not make them! So as a carrier of info services, not a creator of content they will stall!… Read more »

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Piginasack
Guest
Piginasack

Travis, our indicators for ANET have been in a confirmed downtrend since the first week of October ’19 and the indicators can stand a continuing rally for awhile and still not be reversed. I would use the rally if it comes to unass ANET.

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Piginasack
Guest
Piginasack

Sorry, October ’18.

Diane
Guest
Diane

There are also some “Canadian” reports as well

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Normally Dubious
Member
👍126

Made a lot of money on ANET calls…until I didnt…And didn’t ride puts down the other way. As far as marijuana stocks go, I happened to have a call on TLRY last fall when it had that fantastic rise up at – one point the $640 call I bought was up to $14,000 value but then I blinked and it felt to 8000 when I sold it. Figuring that may be a once-in-a-lifetime gain though. I hear many advisers recommend CGC over TLRY lately. Back to ANET, MF having 523K on might be a drop in the bucket for all… Read more »

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jtkacc
Member
👍8

Pot is a gateway to death and America somehow justifies a gateway to profit.The
chickens come home to roost or roast.

money tree
Member
👍34
money tree

Nice article about ANET, thx Travis. Just a few notes since you mentioned The $8k price at Motley Fool, I think that is only if you want to buy everything the’ve got, if they even offer that anymore. And since you teased out ANET, I could also mention that I think they have been recommending that ANET 2014, for a nice return. I feel most confident when both you and MF see good value in a company… two eyes are better than one!

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pone67
Irregular
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pone67

Is the competitive advantage for Arista’s software architecture sustainable? How long before Cisco or Juniper copy this idea successfully and bring down their margins?

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THOMAS T PATTON
Guest
THOMAS T PATTON

I think EVERYONE, and by that I mean every tout, claims to have recommended Amazon, Netflix, Apple,Bidu etc. ad nauseum roughly on the same timeline as early man first started using farming implements to more efficiently put seeds in the soil. Here is a novel idea that will never fly: why don’t they list the other 95% of their early recommendations that ended being the “MySpaces” of the world. I am a novice and I bought Facebook at it’s IPO price. I guess that makes me a savant!!!!! I also bought AOL, a transAtlantic cable company that was going to… Read more »

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crazypalms
Member
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crazypalms

Thanks Travis for a fantastic Post. ANET is a great stock if we are willing to hold for 5+ years (better 10+). The rate at which Cloud computing is taking over the world is breathtaking. Smartphone penetration at emerging markets mean more and more people consume content (via Youtube, Netflix, Prime or local equivalent) – and all these get streamed from the Cloud. ANET is a strong hold.

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JBG
Guest
JBG

Bought in to MJNA stock at about .11 cents, has ben up and down. Any comments on this stocks future?