“Reminds me of Apple…same cult-like following but at 1/40th the price—and growing twice as fast.”

George Leong teases that "If You Like Apple, but Can’t Afford it—You’ll LOVE this Stock"

By Travis Johnson, Stock Gumshoe, June 12, 2012

That quote above is from George Leong, who’s trying to get you to sign up for his Small-Cap Growth Stocks newsletter. He says that new subscribers can “be the FIRST to read about a great undervalued, undiscovered American company that could hand you a $120,000 gain by year’s end.”

Sound good? Well, he makes it sound even more exciting by invoking the names of two of the patron saints of stock-picking individual investors, Peter Lynch and Warren Buffett:

“Peter’s stock-picking strategy: Act like a private investor, quickly snapping up companies unnoticed.

“He also used a style of investing popularly referred to as: “Buy What You Know.”

“Today, Warren Buffett Swears by It

“Hands down, it’s the most perfect investment strategy for all investors—especially for investors who don’t have the time much less the desire to learn complicated quantitative stock analysis or read lengthy financial reports.

“In fact, Peter often said that, as an individual investor, you are far more capable of scoring a 10-bagger than a mutual fund manager.

“Why? Because you’re able to spot great investment opportunities in your day-to-day life—long before the experts on Wall Street can.

“And that’s exactly how I discovered this company I want to tell you about today—which could reward you with a $120,000 gain—if you act fast, and unnoticed….

“I found this deliciously undervalued small-cap stock at … of all places … the mall.”

He then goes on through a long spiel about the target market for this secret company, which is the “echo boom” generation — the first echelon of whom are just hitting adulthood. He talks about this generation’s passion for music, which is similar to every past generation, but makes the point that this one is different because there are no stereos anymore — there’s just the smart phone. Here’s how he puts it:

“The 1st BIG key to this company’s wild success with kids…

“Kids want better sound—just like we did and still do.

“So here are all these kids—literally spending BILLIONS of dollars online for music—but the sound quality on their smartphones, iPods and laptops is, to put it bluntly, CRAP!

“Fast Facts:

  • 62% of all kids aged 18 to 24 own a smartphone. It’s their primary music listening device.
  • 46% of all kids aged 13 to 17 own an iPod.
  • 54% of all teens, and 67% of those aged 18 to 34 watch music videos on YouTube.

“The headphones that come with an iPhone or iPod are terrible. And yet, Apple is the “prestige” mobile device maker!

“Note: Most of these kids have never heard an acoustically accurate stereo set-up. And when they do—it blows them away—just like the first high-fidelity stereo systems blew baby boomers away in the mid-1950s.

“Okay, now fit the pieces of the puzzle together…

“Kids have money, kids love music, which they play on mobile devices that sound terrible… BINGO!

“Headphones Are the New Hi-Fi Sets

“If you’re buying a $130 iPod or a $500 iPhone, spending another $50 to $60 for better sound—better headphones—makes perfect sense.”

So yes, you guessed it, he’s pitching a headphone company. Which one? Well, Leong knows that his target audience is folks in their 50s and 60s (that’s who all investment newsletters target, with a sub-preference for grumpy white men of means), and he has to explain to this audience that fancy headphones are more than just a little niche market:

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“Even during the recession, headphone sales surged as traditional stereo sales evaporated. Headphones are now a $1.2-BILLION market, according to market research firm NPD Group.

“After trending at 30%, headphone sales spiked 42% last year. The curve is getting steeper!

“Kids under age 24 account for 25% of this high-end headphone craze. Just a year ago, they were only 13% of this market segment, so they’re getting into better sound in a BIG booming way.”

So which headphone company is he teasing? Don’t worry, we do get a few more specific clues:

“… it’s been able to skyrocket to the #2 position among headphone makers (and the #1 position for earbud headsets), with 14% of the market, second only to Sony with 23% ….

“This Company Is PROFITABLE!

“And the 2nd BIG reason kids want these headphones: The ‘coolness factor!’

“While older audiophiles may scoff at the wild colors and ‘extreme’ design on the company’s headphones, the kids love it (even the company’s name is edgy, and bordering on the outrageous).

“You know as well as I, with teens it’s all about making a statement—image and brand is everything!

“Want proof? Go to the mall, or Best Buy, or Radio Shack (this company’s headphones are also available at Target, Wal-Mart, and Dick’s Sporting Goods, among other retail outlets) and ask the guy behind the counter what brand the kids are buying (a true Peter Lynch tactic)—and you’ll immediately hear this company’s name” ….

“… currently derives 6% of its net sales from Europe….

“bought out its European distributor for $18.6 Million, giving it a better base to expand in that region and the ability to inflate its margins by absorbing the middleman.”

And then we get into the lovely little “numbers” clues that often help us confirm the answers from the Mighty, Mighty Thinkolator:

“… $428-Million market-cap company—selling in more than 70 countries….

  • The company has 14% of the market and reported revenue of $232 Million.
  • The company is also above industry trend in terms of growth. Revenue climbed 45% from FY2010 to FY2011 (from $160 Million to $232 Million).
  • All 9 analysts covering the company rate it either a BUY or a STRONG BUY.
  • PEG (Price/Earnings to Estimated 5-yr Growth): 0.67—this company is clearly UNDERVALUED!
  • Return on Assets: 21.48%
  • Return on Equity: 42.81%