This is the little ad snippet that sent me down a rabbit hole today:
“The $10 Company at the Center of a Revolution: It’s inked four deals with huge players in its sector, and it’s holding the keys to a potential global product. Click here to learn more…”
It led to an ad titled “The Secret of the World’s Greatest Stock Picker,” which is trying to sell us a subscription to Bill Patalon’s Private Briefing ($39 “on sale,” renews at $79) and a special report called “Cashing in on the ‘Smart Sensing’ Revolution.”
The “World’s Greatest Stock Picker” bit is obviously silly, but we should address it briefly… here’s how he sells himself:
“As of today, I am the world’s GREATEST stock picker.
“I don’t say this to brag – just to point out, based on every track record I’ve seen published today, nobody has come close to me.
“And when you see exactly HOW I’ve been able to help my followers get the chance at these windfalls, you’ll agree, I’m onto something that is very real, extremely profitable, and has NO end in sight.
“In all, as of writing this, I have 217 double- and triple-peak gain winners since I began keeping track in August 2011.”
No one else that I’m aware of publishes a list of their “double and triple peak gain” winners, of course, so it’s easy to have the best one… and his isn’t published either, so we don’t have any way to assess that list.
And, of course, “peak gain” is not a useful measure — that’s just claiming credit for the highest price a stock every saw after you recommended it. Most investors care about what their portfolio performance is like, and how they’re able to focus on strong investments and avoid bad ones… but if you’re just spitting out a few stocks a week and taking credit for the ones that went up, while not mentioning the ones that went down (some of them went down, of course, even in a bull market some stocks fail to rise), doesn’t tell us much of anything. There have only been 357 weeks since August 2011, did he present a thoroughly researched and interesting idea each week? Two ideas a week? How did they do on average compared to the (rising) market? We don’t know.
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So yes, I’m sure Bill Patalon has picked a lot of winning stocks — in our history of tracking his teaser picks he has pitched a couple that have doubled, and a couple that have lost 100% (or nearly), which isn’t all that unusual in this universe (those are “hold until today” returns, of course, not “peak” returns for the magical beings who always sell at the top).
If he has recommended hundreds of stocks over the past seven years, it wouldn’t be at all shocking if 217 of them were up by double digits or triple digits (those are usually shorthand for the percentage gains — so double would mean it rose by somewhere between 10-99%, triple somewhere between 100-999%). After all, the S&P 500 has returned 140% to investors since August of 2011, and I imagine that if you had just said “Buy the S&P!” once a week for those 7+ years you’d probably have more than 100 triple-digit gains and about 200 double-digit gains (and, for the past year or so, some losses and tiny gains).
But anyway, we know those kinds of claims are silly… just wanted to point out a few numbers to help keep expectations in check. If you go in assuming he really is the “World’s Greatest Stock Picker,” well, then you’re probably not going to be as inclined as you should be to consider the idea carefully and skeptically.
So now we can move on — what’s this “$10 company at the center of a revolution?”
Let’s start with his “strategy” … here’s how he describes it:
“My method outfoxes Wall Street at its own game – and lets you capitalize on the ability to be nimble and fast-acting… running circles around the mega-investment banks, whose gargantuan size and massive holdings preclude them from making the same lightning-fast moves.
It works by first looking at thousands of pieces of economic research and data to identify what I call ‘Disruption Zones.’
“MY SECRET SYSTEM ENDLESSLY SEARCHES THESE ‘DISRUPTION ZONES’ FOR SMALL STOCKS READY TO EXPLODE
“Capital Disruptors: These are disruptors that affect the flow of money (cash, credit, digital, and others), how it is packaged and managed and how, where, and by whom, trades and transactions are intermediated.
“Paradigm Disruptors: These are disruptors that affect the fabric of humans’ daily lives and create transformational changes affecting the physical world, social constructs, and our individual existence.
“Systemic Disruptors: These are disruptors that influence the backbone of human society, and create transformational changes affecting how societies are governed, how states, businesses, and our lives are organized and managed and how the mechanics of existence and change operate.
“These are trends, technologies, movements, or sectors about to explode with profits as they dramatically change the status quo.”
OK, so that’s what he’s looking for – “small cap disruptors.” Nothing shocking there.
He also says he looks for “impact triggers” — which means, to paraphrase, finding stocks that have something original or unique or a “first mover” advantage, some kind of big government or “big money” approval or backing, lots of insider buying or “knowledgeable outsider” buying, or “chatter” about a possible buyout.
Again, nothing terribly shocking — those are some of the criteria that lots of investors look for in identifying exciting “story stocks.” He also says he needs several triggers in place at the same time to recommend a stock.
And beyond that, he says he has a “seven-point data match” to further narrow down the choices, he says that his stock must score in the top 5% across several quantitative measures — including price to free cash flow below 10, 3+ executives buying, PEG ratio below 1, etc.
Which means the “disruption zones” could easily be a lot less significant than those “data match” requirements, because at the moment a screen of stocks with market caps below $5 billion that have a price/FCF ratio below 10 and a PEG ratio below 1, with at least three insider buyers, gives you only 19 stocks. None of which look particularly sexy at first glance, though there are lots of different data sources and interpretations for some of those citeria. I wonder if the pick he’s got in mind today is one of those 25? Here’s the list, in case you’re curious:
Let’s find out what he’s teasing… time for some clues:
“It could be the biggest technology breakthrough of the decade….
“Technology giants like Apple and Microsoft are making huge multi-million-dollar investments in this space.
“Defense contractors and the U.S. Military are using this market’s technology to give soldiers a competitive ‘advantage at sea, land, and air.’
“My point is: There is not a single doubt in my mind that this market could make investors huge money in 2018.”
So that’s cutting it a little close — and this isn’t an old letter, it’s got “December 2018” under the signature line. Will you really make “huge money” in the next three weeks?
How about some specifics, Bill?
“… my method has pinpointed a single company at the center of it all.
“It’s a 95-year-old technology and research firm based right here in the U.S. – just north of San Jose in California.
“And this firm has developed a technology I am 100% convinced is going to change the way the world ‘sees’ things.”
OK… he goes on to say that this is a “smart sensing” stock, which he says incorporates “high-performance technology” and “big data.” More details:
“Smart sensing takes input from the physical environment and uses built-in components to perform predefined functions when specific criterion are met.
“In other words, it takes outside information, internalizes it, and makes decisions based on the data.
“And it’s about to make life exponentially simpler and more exciting for everyone….
“Cities will be able to use it to do anything from monitoring the structural health of buildings to traffic congestion control.
“Homeowners can implement it to detect window and door openings and avoid home invasions.
“Hospitals can monitor conditions of not only patients – but also temperature conditions inside freezers storing critical vaccines, medicines, and organic elements.”
This all sounds like just another iteration of the “Internet of Things” pitch that has been made over and over by almost every newsletter over the years — and it’s not outside the realm of consensus about future trends, it’s just that most predictors have been way too optimistic in guessing at the immediate financial impact of adding new sensors and more data to lots of formerly “dumb” appliances and infrastructure elements and tools, etc.
So who does Patalon think will be the big winner in this “smart sensing” space? Some more clues:
“… this firm is developing and manufacturing the parts needed for this technology to roll out – and fast….
“… just inked four major deals with major players.
“One is a partnership with China Mobile to assist with the roll out of a new network service technology to over 588 million Chinese consumers by the end of 2019.
“Another is with a U.S.-based semiconductor manufacturer that deals in aerospace and defense.
“Yet another was for the $455 million acquisition of communications business elements of the fifth-largest defense firm in the U.K.
“And the fourth is the biggest of all – a deal with the U.S. Department of Defense.”
That DoD one is apparently large — we’re told that this little stock “just awarded a $26 million, three-year deal with the DoD to use its proprietary technology to test its telecom systems.”
So that’s quite a good pile of clues, plenty for the Thinkolator to chew on… and Bill says that he “believes revenues could surge from $0.8 billion to $4.533 billion,” which would be a 466.62% revenue increase. Which he thinks will lead to a 471.9% gain (from $10 to $57.19) for folks who buy the stock now and hold it until 2025.
Really precise, right? Of course, they know that although a 400% gain might be needed to get your attention and convince you to subscribe… probably a 40% gain is enough to actually keep you happy and prevent you from sending angry emails and canceling (or posting negative reviews), they just have to get you in the door. There are no real consequences to exaggerated hyperbolic optimism when it comes to investment newsletter pitches, but there are great rewards. For the newsletter publisher, at least.
But anyway, what’s the stock? Thinkolator sez we’re being teased about” Viavi Solutions (VIAV), which is primarily a networking testing and measurement company.
Sound familiar? No, not to me either… but that’s because they used to be half of JDS Uniphase, one of the real poster children of the dot-com boom and bust era. They were created a few years ago when JDSU, which itself had a acquired a bunch of testing companies, split into Viavi and Lumentum Holdings (LITE) (Lumentum was teased last year as an Apple supplier thanks to their face-scanning chips, which served them pretty well well… until we all started panicking about Apple deliveries last month).
The 95-year-old reference is to one of the companies that eventually became Viavi, a company called Wandel and Goltermann that started out as a radio maker and became an electronic test and measurement company. Here’s how they describe themselves:
“VIAVI Solutions, formerly JDS Uniphase, is a global provider of network test, monitoring and assurance solutions to communications service providers, enterprises and their ecosystems. Our solutions deliver end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability. VIAVI is also a leader in high performance thin film coatings, providing light management solutions to anti-counterfeiting, consumer and industrial, government and healthcare and other markets. Additionally, we manufacture and sell optical filters for 3D sensing products that allow facial recognition security authentication for mobile devices.”
They did also just announce another acquisition, of RPC Technology to expand their capabilities in 3D sensing (like what the new iPhones use to scan your face for identity confirmation), and that has seemingly been the plan for decades: buy up new little companies to add to the product lineup. They say that fiber, 5G networks and 3D sensing are their three “key growth areas,” which makes sense — presumably the rollout of 5G will require a lot of testing equipment, and the consistently expanding demands for more and more data will keep pushing fiber-optic networks and, probably, more fiber run direct to end users and within datacenters, which will also presumably require more testing and measurement equipment. I don’t know what the end market size is for 3D sensing, or who the competitors will be, but certainly other phone makers are following Apple’s lead and including that capability in their devices… and we can easily imagine the future applications of 3D scanning and sensing.
The stock price is unremarkable, as is the valuation. They are more than halfway through their second quarter of fiscal 2019, and expect to earn a non-GAAP 15-17 cents in earnings per share this quarter, which would seemingly put them on track to be right around the 60 cents that analysts forecast for annual earnings (on a GAAP basis, they’re still losing money — whether that’s from employee stock options or amortization of acquisitions or something else, I haven’t checked). That means analysts would say they’re now trading at about 17X current year earnings, and with a forward PE of about 15, with earnings growth expected to be almost 30% this year and about 15% next year… (and then 5% in 2021, though we should be mindful that last one is from just two forecasters, most analysts don’t go beyond next year with their guesses).
So the stock is trading at a valuation that looks pretty rational, and they are in a growth industry. I don’t see any likelihood that they’re going to get to $5 billion in revenue over the next couple years as teased, but they should be over $1 billion this year and might grow that by 15% next year. They do carry a meaningful amount of debt, about $700 million, but they also have plenty of cash so they shouldn’t be pressured on that point — even after the acquisition of RPC Technology. My guess would be that they’ll do fine and grow moderately, with continuing serial acquisitions, but perhaps there’s a chance for a real boomlet in orders as 5G networks begin to build out more rapidly next year… I’m no expert on them or their competitors, so we’ll have to leave it at that for now and call on the great world of Gumshoe readers to chime in: Anyone have a modern experience with Viavi or JDSU or any expertise in this sector? Still bitter with them over memories of that 99% drop in the dot-com crash? Let us know with a comment below.
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