Yesterday I started out with a look at George Leong’s “Hidden Stock #1” from the teaser ad for his Pennies to Millions newsletter — today, as promised, I’m following up with the other two stocks he pitched.
These are being hinted at for us as “home run” and “triple digit” opportunities — with the intro to the ad laying it on thick with examples of past stocks that have shown several-thousand-percent gains… so what are the “pennies” that Leong thinks will make you rich? Let’s jump right in to the clues for “hidden stock” numbers two and three…
“My Hidden Stock #2 Has Clear, Triple-Digit Profit Potential
“This company develops and sells safe, innovative products for babies and their mothers. My #2 stock treasure is poised to skyrocket as the U.S. continues its recovery from the Great Recession.
“Many families decided to delay having or not have children during the Recession. Now that we’re in a recovery, I expect the U.S. to see a post-Recession baby boom and increased spending by parents on baby products.
“This Undiscovered Fundamental Value stock is just the company to take massive advantage of this second baby boom. It delivers its health, safety, and wellness products to large U.S. retailers like Amazon, Target, Babies ‘R’ Us, and Wal-Mart.
“Right now, it’s not even close to being a household name. But that could all change fast, as it plans to leverage its relationships with retailers around the world.
“Institutions have purchased over 1 million shares of this hot stock in the last quarter alone…more than 10% of its float. In the last month, its EPS estimate has gone up over 20%. Net income has increased by over 50% in the last quarter. Yet it’s still a great value at around $4.50 a share.”
Well, that tells me that this was first written up by Leong at least several months ago (the stock was around $4.50 last Fall, it’s lower now), and that they are almost certainly teasing a teensy little baby product company called Summer Infant (SUMR)
From a look at the data, it appears that they were on a very gradual growth trend in earnings for their first five-plus years as a public company, even into the financial crisis, but around 2012 the wheels came off and they had a terrible 18 months or so… maybe because of a strategic shift away from licensing in brands or for some other reason that didn’t immediately make itself clear in the charts (they used to sell a lot of stuff using the Carter and Disney brands, but apparently moved away from that into their own brands to try to improve margins). It looks like the business has stabilized somewhat, and they’re almost back to break-even on the income statement now (meaning, they’re almost profitable again). They sell all kinds of baby stuff, from monitors (video and audio) to feeding gear to nursery furniture and strollers, and all of their product lines have fairly robust competition (as you would expect — non one has a patent on the only acceptable stroller or crib).
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This is an absolutely tiny company, with a market cap of only about $50 million (plus another $50 million in debt), so there isn’t a lot of analyst attention — but the analysts who do follow it see huge earnings growth, so the stock is trading at less than ten times expected 2016 earnings. There are a few hedge funds with large stakes, including one that owns close to 20% and has been buying lately (that was a part of a spate of insider buying back in November between $2.50 and $3). So that’s encouraging.
Their latest filing was a brief note about changing the bonus incentives for management, which also looked a bit encouraging to me — instead of aiming for a fixed EBITDA target to earn a bonus, they are now basing it on a combination of EBITDA, operating cash flow, and contribution margin (which is similar to gross profit margin). Incentives matter, and I like bonuses based on cash and operating metrics rather than earnings (partly because earnings are easier to manipulate).
But that doesn’t matter all that much if the underlying business is troubled, of course — and while many folks foresee a baby boomlet happening now as people who have finally dug out from the recession get comfortable enough to bring new lives into the world, we won’t know for a while whether it’s really happening on anything beyond an anecdotal level. So far, what we do know is that there are more and more children born to older parents (30s and 40s) and fewer and fewer born to 15-25 year olds — which is probably a good thing if you’re selling stuff to new parents, because older people have more money and are more paranoid about buying every single possible best thing for their long-awaited babies. At least, that’s how it feels to me — and what our experience was having children in our early 30s. But those are gradual demographic trends, they may give a company a better market to address but they certainly don’t guarantee that all the companies in that market will do well.
They do seem like a company that could be the verge of a bit of a turnaround, with focus on improved operating metrics, but they’re also so small that relatively minor things (like a $1 million recall of batteries for their baby monitors they had last year) can be a big deal in any given quarter — and, perhaps more important, they carry quite a bit of debt. They are focused on improving the balance sheet and extending some debt maturities (the big chunk of debt is due in 2018). On the risks side, they also are very, very concentrated — seven big box and internet retailers make up 75% or so of their entire sales base (Babies R Us, Target, Amazon… you get the idea), so losing accounts or having trouble with any of those large retailers would be a big deal… and they’ve got very, very tight margins anyway (as you can tell by the fact that they haven’t been consistently profitable).
So… kind of interesting, it can be very rewarding to invest in small companies just as they start to generate meaningful positive cash flow — but although the analysts and optimists see that cash flow coming, it’s not here yet and they have some ways to go to even recover to their peak revenue years of 2011 and 2012. They’re operationally risky because small changes have big impacts on the downside, too, so you have to think pretty clearly before buying about how much latitude you want to give a stock like this, a company that’s close enough to the edge that it looks like they have to borrow money when the inventory levels get too high, and how closely you’re going to watch their operations. I don’t own this, but there are few “pure play” investments in the world of “baby gear” and I remember throwing hundreds of dollars at high chairs and strollers every weekend… I’m willing to at least research it a bit more, particularly since it’s down at $3 instead of the $4.50 you might have had to pay last year.
Another? Don’t mind if I do:
“My Hidden Stock #3 Is About to Deliver a Revolution in Wireless Shopping
“Cell phones are about to add a new talent to their abilities: imagine being able to pay for goods and services just by tapping your phone on a register or vending machine.
“While some cell phones and countries already have this service, it has yet to roll out across the United States. Apple’s iPhone 6 is rumored to include a wireless commerce chip, which could break open the market for wireless payments. When it does, this Undiscovered Fundamental Value company will be there.
“This innovative company provides solutions that can convert regular cash registers, vending machines, and other cash-based businesses into “Internet-connected” systems that can accept payments by cell phone and credit cards.
“That’s not the only reason I’m excited about this company. It has a super-low price/earnings ratio of 2.25 (yes, 2.25)!
“What makes this gem even more appealing is the fact that it is accomplishing all this at a 70.3% profit margin, with an extremely low debt-to-equity ratio of 0.09.”
So who is this? Well, I’m afraid the Thinkolator does not have a satisfactory 99%-certain match this time around, partly because the “rumored iPhone6” info confirms for us that Leong’s ad may have been written even longer ago than I thought (though yes, it is still apparently being mailed out today — I got it just this week). There are a great many companies in the cash register/payment system space, and they are all focused on new payment technologies (including the mandated credit card upgrades to security chips as well as the growing mobile/NFC payment capabilities), but none that currently match those clues that I can track down.
Which is probably good, because I continue to think that all of the small payment processing companies will end up withering. There are at least a dozen payment processing companies and networks with market caps of over a billion dollars, all of which are trying like crazy to innovate and win customers, and there are hundreds of tiny mobile payments companies trying to stake out real estate in mobile payments as well… but it’s hard to see anyone toppling Apple, Google, Visa and Mastercard in the US… or the established messaging platforms like Tencent or Facebook/WhatsApp overseas, in countries or communities where credit card penetration rates are far lower than mobile phone penetration rates. If I were to pick a winner of the continuing push to global payments, I’d still probably pick Visa or Mastercard — boring, but I wish I owned them.
So we’ll leave it to the great Gumshoe faithful — care to hazard a guess for this Leong teaser (or have a good solution that the Thinkolator has missed? It’s been known to happen from time to time)? Have other ideas in “baby gear” or payment processing that you think we should consider? Let us know with a comment below.
Disclosure: I own shares of Apple, Google and Facebook. I don’t own any other investments mentioned above, and won’t trade the shares of any companies discussed above for at least three days.