by Travis Johnson, Stock Gumshoe | June 29, 2020 2:08 pm
The emails that I started getting a few days ago start out with a tease about a secret meeting…
“Right near the Pacific coast…
“Where you can smell the salt and volcanic dust in the air…
“There lies a secret compound… one visited by some of the brightest financial minds in the world.”
And, it turns out, that’s not really a “secret compound”, it’s just a nice hotel resort in Nicaragua called Ranch Santana. Looks like a beautiful place, and it’s where the Oxford Club has hosted some of their subscriber confabs in the past — so it should be no big surprise that the figurehead of the Oxford Club, Alexander Green, gave a presentation at a meeting there at some point (presumably before the COVID shutdown, given the travel restrictions we’re all under these days).
Or, as the tease puts it, “Alexander Green was one of the few people on the planet who secured an invite.”
I poke fun at this kind of silliness partly because it begs for it… but there’s a real reason, too: If we’re to take ourselves seriously as investors, we have to get rid of the mythology that there’s a secret cabal of “in the know” people who are having private meetings and accurately predicting the path of the stock market. Sure, there are investment conferences and gatherings all the time, and I often learn interesting things when I attend them, but the people who puff themselves up as all-knowing gurus are not more brilliant than you, and as a group they have no more certainty than you about which stocks will surge higher or fall over the next six months. They have to pretend they do, because that’s how you get subscribers, by puffing yourself up, but try to take these pitches and commentaries as just another piece of an education — not leadership by some infallible figurehead and an entree into a secret “club.”
And, frankly, only go to the conferences if you love traveling and meeting people and want to swim in that lovely-looking pool at Rancho Santana, or stroll that pretty Nicaraguan beach. Which you can do on your own, of course, you can get your own room in that “secret compound” for a little under $300 a night this summer.
But anyway I should get back to the point — the email launched into an “interview” with Alexander Green and a pitch for his Oxford Microcap Trader service, which will run you $1,975 a year (and, as is pretty typical with the “upsell” newsletters on which publishers probably make most of their profit, no possibility of a refund).
This is what they’re really selling, once the sales pitch for this Pacific enclave ends and the stock spiel gets underway…
“Alexander Green Reveals His… #1 Microcap for 2020
“Discover the Tiny $4 Tech Stock With Technology That Will Replace Smartphones”
So that’s interesting… what’s the story? More from the ad:
“You see, Alex and his team just spent a week at an invitation-only investment summit.
“It was held at a beautiful 2,700-acre resort on the Pacific coast with many of the world’s top financial minds to share their very best ideas.
“During the summit… Alex told the story of a $4 stock and its new technology that will replace smartphones.
“The company is one of those transformative disruptors – like Amazon, Apple and Netflix – that come along only once or twice in a generation.
“And despite hearing about dozens of great ideas at the event…
“ALL anyone wanted to ask Alex was… “What on earth is the name of this $4 stock!?”
And conveniently enough, that’s what I want to know, too… so let’s dig in and see what clues he drops in this “interview” with Corrina Sullivan.
“They have NO IDEA this stock exists.
“Yet it might just be the single stock with the most upside available in the markets today.”
And talks about how the stock is “cheap,” trading at 0.8X book value, and yet has very high revenue growth…
“revenue growth for the last five quarters:
“63%… 37%… 37%… 73%… 72%…”
Whatever could it be that’s going to “replace smartphones?”
“This company is a front-runner in a MASSIVE new $23 billion industry.
“The industry is expected to grow to as much as $77 billion by 2025.”
And it’s not just a startup idea, it already has a decent-sized business…
“It has more market share in this industry than even Google.
“Because it has 32 ironclad patents on a new type of technology that’s rapidly changing the world.”
As the Oxford Club has done for years now with Alexander Green’s “son of a police officer” pitch about a “secret $3 stock,” they also hint that this one doesn’t trade like a normal stock…
“It does NOT trade the normal way, on the Nasdaq or NYSE.
“Instead, there’s a special way to purchase bundles of four shares at a time in your brokerage account.
“Most investors don’t know this.
“But if you get shares this way… BEFORE they come available individually on the regular exchanges, you can have a big advantage over regular investors.”
So that’s a good bunch of clues… what does Green mean when he says “microcap?” This is what he says, which will help us narrow down the company by size…
“The penny stock landscape is littered with failed companies that had great stories but no fundamental business behind them.
“And they usually are good for one thing and one thing only…
“Microcaps, on the other hand, are a different story.
“They aren’t pipe dream companies with no sales.
“Rather, microcaps are great little under-the-radar businesses that have a better chance to become midcaps… then large caps… or be bought out along the way.
“So I’m looking for companies that are below a $1 billion market cap.
“Technically, microcaps are defined as being under $300 million, but if it’s a great company, I’m not going turn my nose up at a $900 million company that meets my criteria.
“That’s still small enough to have plenty of room to grow.”
The two examples he gives as past picks are Tandem Diabetes (TNDM) and Applied Optoelectronics (AAOI), which he calls “two of the biggest microcap winners of the last few years”
I don’t know when Green piched those stocks, but we’ll take him at his word that he picked them before huge gains… and I also don’t know when he recommended selling those stocks, if he has. AAOI was indeed available around $10 in 2016, and then shot up to about $100 in late 2017… though it has since come back down to, yes, about $10. TNDM has gone from a “busted IPO” microcap that fell from $20 to pennies from 2013 to 2017 to a stock that started surging mid-2018 and is now close to $90, with a $5+ billion market cap, so if you picked it anytime before 2018 and just held on, you’re feeling pretty good.
So what does this secret company do? Green says they’re involved in “wearables” …
“Health and fitness trackers…
“My #1 microcap even makes ‘smart shoes’ linked to your cell phone!”
And they’ve got a Formula One racing deal of some sort…
“McLaren partnered with my #1 microcap to track the vitals of its Formula One racing team.”
But what he seems particularly excited about are their new products…
“What’s really going to help this company take off is all the consumer products it’s set to launch.
“Its technology is rapidly going to steal away market share from big winners like Peloton and Fitbit.
“It’s on the verge of dozens of upcoming blockbuster announcements that could drive the price into the stratosphere.
“The company stunned participants and consumers at the 2020 Consumer Electronics Show in Las Vegas by unveiling six new products.”
Some of those examples of products?
“A scientific in-home fitness system paired with a 43-inch HD screen and surround-sound speakers…
“A foldable treadmill that takes only five seconds to fold but includes custom JBL surround-sound speakers and heart rate monitoring devices…
“And a revolutionary smartwatch that has 20 days of battery life versus Apple Watch’s one day… and a built-in GPS with GLONASS… but it costs only $140 versus Apple Watch’s $750 cost.”
A few other clues…
“When this company was founded in 2014, it had one mission: to dominate the wearable market.
“It secured not one… not 10… not 20… but a full 32 patents.
“And that proprietary technology is driving its growth at breakneck speed.
“In six short years, this company went from controlling 0% of this market… to becoming one of Apple’s #1 competitors.
“And 100 million people around the world have bought its products.
“Just last year, it surpassed tech giant Apple in smartwatch shipments for the very first time!”
So what’s our stock? Thinkolator sez this is the Chinese wearables maker Huami (HMI), which makes the Amazfit brand of smartwatches and other wearables, as well as a line of “smart scales” — they are partially owned by Chinese smartphone giant Xiaomi, and that’s also where most of their sales come from… they use Xiaomi stores and vendors as their distribution channel, and also make the Xiaomi-branded wearables.
Here’s how the company describes itself:
“Huami is a cloud-based healthcare services provider with world-leading smart wearable technology. Since its inception in 2013, Huami has quickly established its global leadership and recognition in the smart wearable industry by shipping millions of smart wearable devices. In 2019, Huami shipped 42.3 million smart wearable devices. Leveraging its powerful AI algorithm capabilities along with the massive data analysis, Huami provides 24×7 health monitoring services to millions of its product users. Huami seamlessly integrate smart wearable technology into the extensive application senarios of the IoT ecosystem worldwide, creating a smarter and more convenient lifestyle for its users.
“To use the brand, ‘Amazfit,’ Huami’s smart devices mainly include smart bands, smart watches and smart scales. Huami obtained the China National Medical Products Administration Class II medical device approval for our ECG health band products in April 2018. Huami is also expanding into new smart device categories. In early 2020, Huami unveiled four new products spanning three verticals that go beyond smart bands and watches: Amazfit Home Studio, a smart gym hub; Amazfit AirRun, a foldable next-generation treadmill; Amazfit PowerBuds, true wireless stereo fitness earphones with Clip-to-Go design; and Amazfit ZenBuds, sleep-comfort and health monitoring earphones.”
The shares are not technically trading at less than book value according to the financials I reviewed, but they’re at only about 2X book right now. And yes, they did announce an expansion of their product line this year to move beyond smartwatches and smart scales, including that Amazfit Home Studio smart gym hub and Amazfit AirRun foldable treadmill.
And yes, Huami shares on the New York Stock Exchange are technically American Depositary Receipts (ADRs), and they do technically each represent four ordinary shares of Huami… it’s just that Huami shares aren’t actually listed anywhere else as far as I’m aware (most ADRs represent shares that trade elsewhere, like Hong Kong or London, but Huami doesn’t have another listing on an exchange anywhere else). Those ordinary shares do exist, but they’re presumably all held by insiders or other early backers in China (like Xiaomi), the only way outsiders can buy the stock is through the ADRs. I don’t know why they did it this way, it’s a little odd to list an ADR in New York without having a listing anywhere else, but maybe it’s just cheaper or easier to get a ADR listing than to actually get listed on their own.
So yes, it’s technically a way to get four shares in one purchase… which means that with the ADR trading at about $12, the “ordinary shares” are worth about $3 each — and that would have been closer to $4 each a few months ago, when the ADR was in the mid-teens (I haven’t seen the ad before, but it’s dated April 2020 — Huami got as high as ~$14 then). That does not mean it’s on the verge of getting a “better listing” on the NYSE and therefore jumping higher in price — that doesn’t really make any sense. They’re already fully tradable in NY by anyone who’s interested, they even have options trading, so probably the only thing, listing-wise, that might bump up their valuation would be if they list on the stock exchange in Hong Kong or Shenzhen to appeal to the investors who are more likely to recognize the Amazfit brand or be Huami customers. This is not some secret “pre-IPO” deal or anything like that.
And those revenue growth numbers that Green cites are accurate, but only up until the fourth quarter with its 72% revenue growth number… for the first quarter of 2020 that fell substantially, to 36% growth. I’m sure that the coronavirus was a big reason for that de-acceleration in revenue growth, but it looks like they’ve also got quite a bit of seasonality, with their growth coming mostly in the third and fourth quarters in past yaers, so maybe it will pick up again later this year. Their outlook for the second quarter, announced in their 1Q press release, is for flat revenue year over year. Those are all assuming that you leave the numbers in Chinese Yuan Renmimbi, if you translate to US dollars, as you’ll see in most of the financial sites that collect their filings data for US investors, the growth looks a little less impressive because the dollar has risen in recent years vs. the Chinese currency. They sell very little outside of China, so the currency impact can be substantial for investors.
Finally, yes, Huami is profitable — which is a little unusual for a high-tech small-cap. They have a market cap of about $750 million if the numbers in YCharts are accurate, with about $230 million of net cash on the balance sheet, and have reported a profit now for five quarters in a row… so I can see why you’d be impressed with the financials, it’s rare to find profitability, a below-average valuation, and a solid revenue growth story all in the same package.
Right now, the trailing earnings for the past four quarters come in at $1.21 per share… so at $12.75 or so per share the math is pretty easy, the stock is trading at a trailing PE of just over 10. That’s cheap compared to almost any other stock in the market, certainly any stock with revenue growth, and if you back out the surplus cash it’s cheaper still (the list of profitable companies with PE below 11, no net debt, and revenue growth of at least 30% is very short, about 40 companies, and all of them have something a little odd in their story).
The earnings could easily come down in the next quarter, since it’s pretty likely they’ll lose money if the sales number is as weak in the second quarter as they expect, but if this is a sustainable brand and market position they have in Chinese wearables, then the current valuation does give them a nice cushion for a bad quarter or two.
If I were researching this stock, I’d start off being impressed with their valuation and their steady sales rate for their core Amazfit smartwatch business… but a little bit worried about their reliance on Xiaomi for distribution and their push into new products and maybe new geographies, since I have no idea what the plan is for their higher-end stuff like the “smart gym” and treadmill, particularly about whether the CES presentation means they’re trying to move into the US market in any meaningful way.
Right now, their smartwatches and earbuds in the US and European markets seem to be competing in a morass of low-cost products, so even if they are higher quality (I’m no judge of that) I don’t know that they can build the brand to tell that story outside of China without spending a lot of money. The difference between $40 wireless earbuds and $200 Apple Airpods (or a $99 smartwatch and a $300 Apple Watch) is partly function, quality, cross-device compatibility and design, but a lot of it is brand positioning and trust. Apple spent a lot of money building that brand, and brand reputation doesn’t come cheap. The same is true of NordicTrak or Peloton in the “smart gym” market, there will always be buyers for the cheapest product even if that company doesn’t spend a lot on marketing, but the maker of the cheapest product also has to be always looking over his shoulder at the similar low-end product being offered by a competitor.
Just to give some perspective, HMI reports about the same level of Selling, General and Administrative (SG&A) costs as Apple — about 7-8% of sales, on average. For HMI, more than half of that is marketing, and for Apple we don’t know exactly but it’s probably in that neighborhood. By contrast, smaller firms like Peloton or Fitbit who are trying to build brands in these markets spend about 30% of revenue on sales and marketing. That indicates to me that Huami is not likely to become huge, and will be limited to whatever Xiaomi gives them. No marketing spend, no brand.
Maybe that’s too pessimistic, and maybe they’re just lucky because Xiaomi does a lot of their marketing for them, but that would be my thinking going in. The stock could easily do just fine from here, they’re profitable, cash-rich, and carry a cheap valuation, and they have a strong distribution partner in Xiaomi, it’s just that their growth might be stunted if they stay in China, compete on price, and aren’t able to build a premium brand. Not having been in China myself, and having researched the company only enough to give you an answer and a few quick thoughts today (I confess, I haven’t even read their SEC filings), maybe I’m missing something and Amazfit is a hugely popular and growing brand in China, with massive growth potential, and they’re about to take off, with margins improving… and certainly China is plenty big enough to make it possible for a strong fitness and wearables company to grow without leaving the Middle Kingdom.
So the next step is yours… go forth, researchify, and let us know what you think — is there gold in Huami’s future? Is this just another competitor in a busy smartwatch swarm, or is it a growing Chinese fitness brand akin to Peloton and Fitbit in the US? Something in between? Where do you come down? Let us know with a comment below.
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