“The Motley Fool’s Next 10-Bagger”

Few terms get as much of a rise out of investors as “10 bagger”, the term popularized by Peter Lynch that refers to a stock that increases 10 times in value — and perhaps for good reason, since these kinds of hyper growth stories, even if they take a decade or more to unfold, are rare ducks indeed.

And no one likes the term more than the Motley Fool, whose founders continue that search for ten-baggers with their monthly Stock Advisor newsletter. Want to find out who the latest candidate is?

“Imagine snapping up shares of Disney stock in 1982 just as the VCR emerges, making “properties” like Dumbo, Cinderella, Pinocchio, and Sleeping Beauty into MODERN GOLD MINES…

“At the same moment the BULL MARKET of the 1980s and ’90s is born, pushing your shares up 1,000% in 7 years… and then 2,500% over 15 years!

“You’re about to discover just such an opportunity. In fact, this could be THE STOCK STORY of 2010-2025…”

They don’t pull out the hoary old “what you do with your newfound wealth is up to you,” but they sure do paint a pretty picture of massive profits flowing through to your pocketbook.

The ad also tells us that now is the time to buy — before the recovery is on the tip of everyone’s tongue:

“by the time you read about an economic recovery in the paper — nearly half the profits will already be booked…

“And with the Dow up more than 24% since its March 9 low… ‘I can hear the train a-comin’!’ to paraphrase the late, great Johnny Cash.”

[And just to add on to that, the S&P 500, which unlike the Dow actually means something, is now up almost 40% from its low — still waaaaay down from the multiyear highs, of course, but way up from that low in March.]

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They compare investing in this environment to investing at the depths of the early 1980s blahs [I was cursed with acne and adolescence at the time, so I challenge your blahs to match up to mine] …

“That’s because we’re again at a moment of profound doubt and opportunity. And the best way to invest today is the same as it was back then…

“In fact, it’s been the same throughout the market’s history. Just ask investors like Warren Buffett, Peter Lynch, and David and Tom Gardner (who have studied the investing masters closely), who understand that the single most important secret to building a stock market fortune is identifying a unique growth business poised to dominate a mass market…

“Then scooping up shares and holding them tight as the market scales the wall of worry!”

And then we get into the clues about this top secret company …

“The Motley Fool’s NEXT 10-Bagger… the opportunity I’m about to describe shows remarkable similarities to Disney in 1982, and even Marvel in 2002 when David recommended it. Here’s the story…

“This company is revolutionizing its industry. It has a slew of revenue streams that should only grow stronger over time. And we project that it will continue growing at a steady pace well into the next decade….

“This little entertainment dynamo has created some of the biggest Hollywood blockbusters in its category over the last few years. It owns a rich portfolio of intellectual property and boasts talented and experienced leadership…

“And here’s the sweet spot in all this: Widely appealing content like this can create multiple, expanding revenue streams — we saw it with Disney in the 1980s and ’90s (a “25-bagger” between 1982 and 1997!)… and more recently with Marvel (a “10-bagger” between 2002 and 2008!) — and today, this company has some of the best trademarked and copyright-protected characters and content on the planet…

“Which fuels its very profitable model and vast beyond-the-box-office capabilities in DVD sales, as well as product licensing to video game companies, toy companies… even fast-food chains!

“Believe me, I’d like nothing more than to give you the ticker symbol and all the details right here. But out of respect for our paying Stock Advisor members, I must send you the full write-up in a brand-new report called ‘The Motley Fool’s NEXT 10-Bagger’…”

So that’s the big picture about this business model — how about a couple specific clues?

“… market cap under $2.4 billion….”

So that should be enough for the Thinkolator, yes? Indeed. But first I have to tip my hat to forum mainstay womanwithportfolio, who also suggested the same answer I’m about to give you right now:

Dreamworks Animation SKG (DWA — click here for a free trend analysis)

Our old friend womanwithportfolio, by the way, also runs a pretty cool website herself that you can check out here … but let’s talk about Dreamworks for a minute.

This is a stock I owned a number of years ago (as I did Marvel, David Gardner’s similar stock that he rode to a massive gain over the last seven years — MVL, by the way, could also pretty precisely match most of those clues, but that would be really sneaky). Dreamworks is the animation studio behind hits like Shrek, Kung Fu Panda, Bee Movie and the more recent Monsters v. Aliens, spun off several years ago from the star-studded Dreamworks studio and run by Jeffrey Katzenberg (the “K” in SKG, which also honors Stephen Spielberg and David Geffen, neither of whom is actively involved in DWA). The original Dreamworks studio is now owned by Viacom, but Dreamworks Animation remains independent and publicly traded.

And yes, it was recently priced at a market cap of $2.4 billion (it’s slightly above that now — and the stock has run up about 40% just since April). The shares trade at a current and forward PE of about 14 or so, which is actually very similar to Marvel, the closest comparison company I can think of. Dreamworks makes money by developing new characters and films, showing the films in theaters (through distribution deals with major studios where they get a cut — used to be Paramount, not sure if it still is), and, more importantly, licensing the characters for a thousand products and selling DVDs.

Dreamworks just had their best quarter ever, thanks to the fact that they have a pretty big library of films now that are all generating at least a little bit of revenue (ie DVD sales of Shrek, etc.), and a blockbuster hit last Fall in Madagascar 2. The current movie, Monsters Vs. Aliens, looks like it’s a big box office hit, too, though not in the same league as the Madagascar sequel or any of the Shrek movies so far.

And Dreamworks is pretty much done for the year.

No, that’s not really fair — but, like Marvel, they’re not releasing two feature films this year … I haven’t looked up the reasons, but it could easily be due to the writer’s strike that helped push Marvel’s plans off schedule a little bit, or maybe they planned it this way. Dreamworks has typically tried to release two movies a year, and they recently announced that they’ll be aiming for five movies every two years, so a bit of an increase, but the next new one will be coming out in 2010 (How to Train Your Dragon). They do have new business coming in, too, primarily in the form of some TV series’ and specials, including one with the Madagascar Penguins, but those won’t bring in the kind of cash that a new hit film does.

Sentiment about movies, and hits or disappointments in particular, tend to drive the shares of these stocks in the short term and can sometimes make them a bit volatile, so I wouldn’t necessarily urge anyone to rush out and buy DWA (or Marvel, which I actually still prefer) during this current runup … with Dreamworks I would not be at all surprised to see some summer doldrums for the shares, since there won’t be a new feature film to get attention or help analysts project earnings growth (and the next film is an unproven title, not a sequel) — so it could easily be Fall before we start to get a taste of optimism for their next film in the stock price … and of course, the fact that there’s only one film this year means, as with Marvel, that there’s a chance for a dip in the earnings that might make for a better time to buy. Just guessing on that, the quarterly earnings of these hit-driven companies that release one or two new products a year can be notoriously tough to predict. Wedbush Morgan downgraded DWA just last week for much this same reason, you can see the Barron’s note on that here.

Other than that, the fact that the DVD format has not yet died, as many expected, is certainly good news for Dreamworks — if there’s anyone who can be relied on to buy a movie and watch it 30 times, it’s a prepubescent Shrek fan whose parents won’t let him pirate it from a file sharing service. And I’ve been pleasantly surprised at DWA’s ability to continue building hits — I thought, years ago, that they were in danger of being a one-Shrek wonder that would have a lot of misses, and a few of their films have been disappointments, but the fact that they’ve been able to built at least three three sequel-worthy franchises (Shrek, Madagascar, Kung Fu Panda) is very impressive and bodes well for their future profitability.

Of course, you could also always go with the Steve Jobs magic and pick up shares of Disney, owner of Dreamworks’ most direct competitor, Pixar — but you get a lot of baggage, including advertising-dependent networks, travel-dependent theme parks, etc., as well as some nice bonuses, like ESPN, and a far more diversified income stream.

Or you could pick up shares of Marvel, which gets more of its money from licensing and spends less of its own money developing the films, and therefore generally has a dramatically higher return on equity than Dreamworks. They’re all priced at almost exactly the same PE ratio right now (Dreamworks and Marvel are about the same size, Disney is, of course, much larger), and I’d probably pick Marvel out of that batch for my first buy … but to tell the truth, I’d rather wait for better prices on all three of them after this Spring rally we’ve had.

The reason that David Gardner is able to make outsize claims about his ability to pick Marvel (he bought it around $3, it’s now at $34) was not that he bought a growing company with what everyone recognized was a spectacular business — no, he first picked Marvel back in 2002, when they were still foundering from a financial disaster and trying to drag themselves out of the muck by licensing Spider Man movies to Sony for pennies on the dollar. If you waited for Marvel to have a good-looking business, a nice financing deal for their owns slate of movies, and a few more hit licensed films, you would have been lucky to pick up shares at $15 … still a 100%+ gain over a few years, but that’s a far cry from 900%. And if you waited for confirmation that they could self-produce a hit like Iron Man, you might have bought the shares last Summer after that movie became a blockbuster, at which time they were trading right around where they are now. The huge gains may well come from buying when other people are a bit more pessimistic than they are right now about DWA or MVL.

The entertainment business is one of the mainstays of the American economy, and it tends to perform well during recessions (movie theaters have had a great year, with lots of packed houses), so business will probably continue to be good for Marvel and Dreamworks … but if you’re planning to hold stocks for a long time, it’s often better to buy these kinds of companies, which usually have lumpy earnings, when there aren’t a lot of folks screaming about how great they are.

According to the Fool’s disclosures, by the way, Stock Advisor has recently been still recommending all three, Marvel, Dreamworks, and Disney.

So what do you think about Dreamworks? Ten bagger potential? Let us know with a comment below. And if you have ever subscribed to Motley Fool Stock Advisor, click here to review it and let us know what you think — the average review so far is a fence-straddle.

Just to be clear, I have owned Marvel and Dreamworks Animation in the past, but I don’t currently owns shares of any of the stocks mentioned above, and won’t trade in any of them for at least three days.


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A. Zammit
A. Zammit
11 years ago

I own shares of Disney because I believe Pixar has a great future with lots of profit to add to the company. In terms of animation movies… Pixar > DWA . I wish Pixar was alone on the market and not with Disney (HUGE potential gains) I would however buy into Dreamworks the NON-animation side as they have some excellent movies that they have been producing.

womanwithportfolio
11 years ago

Thanks for the tip of the hat, Gumshoe, and I offer you a tip of the Easter bonnet to the Dashiell Hammett of the stock world. Dreamworks has been scoring with Kungfu Panda and Madagascar II, and they’ve got a very promising title coming up: How to Train Your Dragon.

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womanwithportfolio
11 years ago

I have a thing for dragons myself, and I have an idea that this one is going to be cute. Everyone will want one.

Chris
Chris
11 years ago

So MF is saying they can go from ~$2.4B market cap to ~20.4B market cap, all other things being equal? Really? Or, a stock price of about $19 when they released earnings in April to $190? That seems kind of steep to me

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Michael
Michael
11 years ago

There was another pick by Tom in that same ad – went like this:

“…Tom’s NEXT 10-bagger…

Identity thieves, data pirates, and hackers could make possible a Foolish pile of profits…
After all, someone has to protect us against these guys, right? That’s why Tom is right now recommending shares of a company that provides security hardware and software for online banking and e-commerce. We’re talking about a fast-growing small-cap company with huge market opportunity!

It’s run by a founder-CEO with a large stake in the business… one of the things Tom always looks for. And while the banking industry makes up about 82% of total revenue (e-commerce and other types of Internet transactions bring in the other 18%), this company is well protected from the current banking fiasco in the United States.

In fact, the number of new accounts with banks last quarter nearly doubled over the same period last year. Here’s why: The majority of the firm’s business is done internationally — about 94% abroad and only 6% in the United States.

Tom’s NEXT 10-bagger serves about 8,500 customers, including banking giant HSBC, ING Bank, VeriSign, and CoStar.

The company has $57 million in cash on the balance sheet. And zero debt. It’s growing like a weed and staying amazingly profitable. Because its no-nonsense business model affords it a 71% gross and an 18% net margin. In addition, returns on assets (16%) and equity (26%) are outstanding for any company…

It’s valued at less than $300 million. So, like David’s pick you read about a few minutes ago — it has a ton of room to grow!…”

I was trying to figure it out, but most of these companies that use the technology aren’t exactly forthcoming with the info needed to verify who their security hard/software source is.

Thanks!

mikefunk2002

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womanwithportfolio
11 years ago

Probably VASCO (VDSI), but needs more sleuthing to be sure.

New Good Link « Cheap, Lazy Investing

[…] to the Stock Gumshoe for recommending Woman With […]
OH! You’re my new favorite blogger fyi

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John Morgan
John Morgan
11 years ago

A few years ago they were on the cash flow binge and were out of sight on Nokia at 57. I emailed them and told them that they were out of their minds. Earnings were nil but NOK was really selling product. Duhhhh. The fools totally forgot the idea is to produce profits which down the road may produce sustainable dividends.

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Trevor Naylor
Trevor Naylor
11 years ago

I am a subscriber to the Motley Fool Stock Advisor and just received the June edition. Nowhere can I see Dreamworks mentioned? Is it more likely to be NETFLIX which both David and Tom are currently recommending as a CORE holding?
regards

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Ron Pfizenmaier
Ron Pfizenmaier
11 years ago

Have you ever checked out this
Amy Calistri girl? or this newsletter picks?

I would love to know more, thanks

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Ron Pfizenmaier
Ron Pfizenmaier
11 years ago
Mark
Mark
11 years ago

Yes what about the banking security company?
It is strange that they didn’t mention Netflix in the article. The reason they didn’t is because it hasn’t reached the level of percentage growth the others have already.
Of course the sell recommendation is Activision.

I agree that Dreamworks would never reach the 20Billion heights in revenue…but that’s not the point.
MARKET CAP is the level being sought. So in order to reach that stock price point you have to figure out what a MarketCap of $20 billion at the current FLOAT & mainly what REVENUE it would take for it to achieve $20 Billion Market Cap…and only THEN will you have your stock price.

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Nate
Nate
11 years ago

You need to change the name the name of this blog to stockgenius. For you are selling yourself short with the title of gumshoe!

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aryan
aryan
11 years ago

Linear Tech (LLTC)

michael murphy
michael murphy
10 years ago