Here’s the headline of the latest ad from the Casey Research folks…
“The One Step the President Must Take to Push the Dow Jones to 50,000 – and GUARANTEE He Wins the Next Election.
“This is the Start of the Last Bull Market of Your Life and a Massive Opportunity to Get Rich Before it’s Too Late.”
See what they did there? In two sentences you have a “red meat” political statement to get attention (whether Trump reelection horrifies or delights you doesn’t matter, what matters is that you pay attention), a “greed” tantalizer that promises massive returns (DOW 50,000… which would be roughly 100% returns from here), and, in what really gets peoples’ attention, a “fear of missing out” pitch that those of you who missed out on the recent bull market or the bitcoin craze or the hot biotech or whatever else have just one more chance in “the last bull market of your life.” And, of course, you get the implied “before it’s too late” deadline that makes you pay attention now.
That’s pretty good copywriting… if you throw in “you’re one of the only ones who will know this secret” you’ve pretty much covered the gamut, and you’re ready to pass your ad copywriting class after two sentences!
But we’re not here to praise the copywriter, of course, we’re looking to answer questions about this teased investment idea… and to defuse the marketing hype a bit so you can think clearly for yourself… so let’s dig in.
“About 20 miles southwest of Houston lies a ‘top-secret’ operation…
“For the Oval Office, it is simply “too vital to fail”…
“Its sheer scale is breathtaking.
“Right now, some 3,000 specially trained scientists and technicians are toiling away, day and night…
“Inside a cavernous facility, I’ve dubbed ‘The Texas Silo’…
“The only thing that I can compare it to is the Manhattan Project during World War II…”
And we get “top secret” in the first sentence of the ad… and a made-up name for a top-secret location! This one might end up in the copywriting textbooks.
I know, I know, I’m supposed to be focusing on the reality behind the ad… don’t worry, I’ll move along.
The pitch, by the way, is for The Casey Report, the “generalist” newsletter from the Casey folks (now controlled by Stansberry Research), which will run you $149/year.
And apparently E.B. Tucker, the Casey analyst who signs this ad, thinks that “if the White House wants to win in 2020, they need this ONE company to succeed and help push the Dow Jones over 50,000.”
So what’s the company? It’s got something to do with technology… here are a few clues:
“… one sector, in particular is driving the market’s double-digit percentage rise. Technology….
“Facebook, Amazon, Apple, Netflix and Google – account for 10.6 percent of the index.
Together, these five powerhouse stocks make up more than one-tenth of the entire stock market.
“This should make the White House nervous.
“Because the market can’t go up unless they go up.”
But apparently there’s some small company that’s critical to the tech sector. Tucker says that “the company I’m recommending today is central to all this” and goes on to share some specifics…
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“… without this firm’s technology…
“Amazon would be hard-pressed to guarantee its famous “next day delivery…”
“Facebook wouldn’t be the king of social media…
“… and Netflix couldn’t stream hit shows like Ozark without freezing Jason Bateman mid-frame.”
And, in my favorite part of the tease, we get that most delectable of words to tempt all the investors into our lair… monopoly.
“This no-name company has a ‘quasi-monopoly’ on virtually every tweet (all 200 billion per year)… every photo shared online …
“And practically every penny earned by the biggest companies in the digital world.”
So this “Texas Silo,” the ad says, is “The ONE Company Amazon, Facebook, and Netflix Can’t Function Without.” Makes you wanna know the answer, right? Me, too.
What do they do? According to the ad, they manufacture an “optical transponder” — so this is some sort of fiber-optic equipment company. Any more specifics for us?
“You’ll find at least one of these devices inside every data center in the world.
“All 8.6 million of them!”
“This secretive company happens to be the premier manufacturer of these optical transponders for data centers….
“The “Texas Silo” makes a whopping 71% of its revenues from three major data center customers: Facebook, Microsoft and Amazon.”
OK, so that doesn’t necessarily sound like a monopoly… if you’ve got a market where there are only a few buyers (as opposed to only a few sellers), economists will probably get all fancy on you and call it an oligopsony, with a fair amount of power in the hands of the customers. Just ask mobile chipmakers whether they can set their own prices and keep nice, high margins if Samsung and Apple together make up 75% of their sales.
Though of course, if this secret “Texas Silo” company does happen to sell something unique…or at least uniquely much better than its competitors, perhaps it could still be a monopoly when it comes to pricing power. Let’s see what other clues drop into our lap…
Apparently they’re at least an indirect beneficiary of the government spending on digital infrastructure and the “intelligence cloud” as well, per the pitch:
“While they don’t have a direct relationship with the government or the intelligence community, the Texas Silo’s technology is ESSENTIAL to contractors (like Amazon) who work directly with the CIA…”
And it’s a much smaller company than the likes of Amazon (as are most)…
“It’s another way to play the tech giants by owning a piece of a company that is crucial to keeping companies like Amazon, Facebook and Microsoft, purring like a kitten.
“And it’s available today for about 1/1000th the market cap…
“So, it’s off the charts in terms of upside potential.”
So that means we’re dealing with a company that has a market cap in the $500 million range… quite small, but not ridiculous.
What else? Tucker says that optical transponders are in the midst of a “rapid upgrade cycle” that he thinks will benefit this secret “Texas Silo” company….
“As recently as 2016, 40 gigabytes was standard—able to process larger amounts of data quickly.
“But that’s changing, and fast.
“… 40G is being phased out and replaced by 100G….
“It will make up 95% of the optical transponder market by 2019.”
And this particular company has seen 100G products go from 5% of sales to 50% of sales in about two years, we’re told. And has something better on tap, too… a final clue:
“… on November 13, 2017, the ‘Texas Silo’ made a major announcement even I wasn’t expecting.
“They’re upping the ante with a new range of superfast 400G transponders!
“This breakthrough will catapult them to a whole new level.”
To keep with the general air of moderation and tranquility, the special report they’re peddling to subscribers is called “TRUMP 2020: Grab 1,000% Profits from the Only Company that Can Save the President.” So what, pray tell, is that “only company?”
Thinkolator sez we’re being teased about Applied Optoelectronics (AAOI), which is indeed a manufacturer of fiber optic networking equipment. And it is looking a lot more attractively priced now than it was last Summer, when the price briefly spiked to $100 a share — it’s around $28 today, close to the 52-week low after a disappointing earnings report last week.
AAOI is that rarest of all beasts… a tech stock that actually is getting downgraded and even has a “sell” rating from a Wall Street analyst (I kid, but that’s not so far from the truth), and it appears that their drop in earnings and sales this quarter has a lot to do with that… as does the widespread analyst expectation that the big growth last year was a one-time jump, to be followed by very low single-digit sales growth and a drop of more than 20% in earnings per share in 2018.
So that’s the basic backdrop: Analysts have cut their 2018 earnings expectation to $3.44 per share for 2018, way down from the $4.62 in non-GAAP income they earned in 2017, and those expectations may fall further still given the company’s own guidance that non-GAAP earnings per share will be in the 28-34 cent range in the first quarter, less than half of what analysts had previously penciled in.
I don’t know this company well and haven’t looked at them in great detail, but you can construct a little story in your head pretty quickly: They say they have leadership in the technology and are bringing in new customers, but their financials and the “lumpiness” of the business indicate a company in a tailspin that’s on its way to hitting the dirt.
I don’t know if that story of leadership is the right one, or if we should pay more attention to the deteriorating financials and lowered estimates… so this does, at least, stand out as a company that’s worth looking into if you want to figure out whether it’s worth the risk. If everyone agrees that a company is going to soar, then it will be expensive… if you’re the only one who thinks it’s going to turn things around and have a great business in the next year or two, then maybe you can buy a great bargain with a trailing PE ratio below 8 — you can’t buy at prices like that if you’re following the Wall Street consensus. And the consensus certainly ain’t that this company has monopoly power over a vast and growing market.
An hour’s research by yours truly is not enough to make me stand in the way of the tide of analyst concern — I haven’t bought shares, but I will put this on the back burner to look into a little more closely. If you want to sniff around the sector, the most similarly valued stock is probably Oclaro (OCLR), which was teased by Navellier late last year, and I don’t know which companies are specifically competitive with the particular products sold by Applied Optoelectronics, but they are often also mentioned in the same breath as Finisar (FNSR), which has been almost as scary a ride as AAOI over the past year, Lumentum (LITE), which is far larger and more stable (and also has that teased iPhone connection), and you can broaden it out to include Corning (GLW) as well, and probably some others that I’m forgetting.
So there’s your marching orders: AAOI is the stock that matches our clues from the Casey folks, does it sound appealing? Ready to try to catch that falling knife, or are you worried about cutting yourself? Think the data center demand will continue to rise, or that their newest products will take market share? Let us know with a comment below… and if I learn enough about this one to get interested, I’ll make sure to let the Irregulars know in the future (I will not, of course, trade the stock for at least three days, per Stock Gumshoe’s trading rules).
The friendly little comment box below awaits your insights.
Disclosure: I own shares of Facebook, Amazon, Apple, and Google among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.