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Best Revolutionary Stocks: HomeAway (AWAY)

The important thing to remember is that the ideal revolutionary stock has the potential to get very much larger.

Scrabble and Hasbro

Best Revolutionary Stocks



Imagine you’re playing Scrabble, and your opening rack has the letters ADOORRT. Your opponent plays first, putting down HEART. Can you find a way to use all seven of your tiles, thus getting a bingo and a 50-point bonus?

There is one solution—it’s a word you’re familiar with—and last week at my local Scrabble club, I was lucky enough to find it, in part because I’d played the word once before. (You’ll find the answer below.)

Yes, while millions of people play Scrabble online (myself included), I still enjoy driving some 25 minutes a couple of times a month to play Scrabble against real people, all of whom are competitive players. (I’m ranked roughly in the middle.)

But digital entertainment is increasingly replacing analog, and because of that, the company that owns the rights to Scrabble in the U.S., Hasbro (HAS), recently decided to end its financial support of the National Scrabble Association. This wasn’t a surprising decision; the trend was clear. But it does reduce funding for the National School Scrabble Championship. And it does mean that the National Scrabble Championship, which starts in Las Vegas this Saturday and features a $10,000 first prize, will now be totally self-funded. And that’s okay. Players like me who love the game don’t need corporate support. In fact, just a few years ago, we organized into the National Scrabble Players Association, to make up for Hasbro’s diminishing support. But it didn’t have to be this way. And it might not have turned out this way, if only Hasbro had acquired Words With Friends. Words With Friends, you see, was owned by Texas company Newtoy. And Hasbro, which had owned the Scrabble named since 1989, would have been a natural fit for the fast-growing online game.

But Hasbro didn’t buy Words With Friends; Zynga did, back in November 2010, for $50 million.

And the biggest reason of all for passing up that deal is that Hasbro has analog games in its corporate DNA.

The company’s first hit was Mr. Potatohead, which it acquired in 1952. With the original, you had to use your own potato—or other vegetable—which is how I played when I was a kid.

That was followed by G.I. Joe, Transformers, My Little Pony, and a slew of acquisitions that made the company one of the largest toymakers in the world, with revenues of more than $4 billion. Today it’s a generally well-run company, and in cutting its sponsorship of the competitive Scrabble scene, it’s making a small but sensible business decision.

But Hasbro has failed miserably at transitioning into the digital age, and the result is that the company’s growth has stagnated.

Revenues in 2009 were $4.068 billion, and revenues in 2012 were $4.089 billion. Earnings in 2009 were $2.48 per share, and earnings in 2012 were $2.81 per share. Growth, when it is achieved, is slow. Hasbro does pay a 3.4% dividend, however, so even though its stock’s performance is nothing to write home about, it is supported by long-term investors who are happy with the stability of both the stock and the dividend.

But there’s little doubt that Hasbro missed its big chance to get into the digital gaming world.

As to the question I started with, what do you do with ADOORRT?

Play through the E to create TOREADOR.

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Moving on, we leave the sleepy world of dividend-paying Hasbro and enter the exciting world of revolutionary stocks. I wrote about the concept of investing in the best revolutionary stocks last week, and you can read that piece here if you missed it.

The important thing to remember is that the ideal revolutionary stock, like Microsoft back in 1986 or back in 1998, not only has rapid growth in its favor, it also has the potential to get very much larger and it is still viewed skeptically by the majority of people.

This skepticism is important, because these people represent potential buying power for the stock. If a company is already well respected, that potential has already been used!

To illustrate, one reader of last week’s column wrote “[I suggest] Intuitive Surgical which is revolutionizing surgery and making a good profit while doing it. They have such a big lead that a challenge by a major company like Medtronic is unlikely. You better believe the doctors using this equipment strongly defend this revolution.”

My response: There’s no doubt that Intuitive Surgical (ISRG) is a great company, but the fact is the stock’s greatest growth days are well behind it. The time to own the stock was in 2004 and 2005, when doctors were just discovering the technology and investors were jumping on board. Today (as he says) doctors love the stock and all major investors know it. And today, many of them are selling ISRG (in part because the company’s recent second quarter forecast just fell short of analysts’ expectations) and moving on to greener pastures. Sure, Intuitive Surgical will survive and I hope it thrives, but as its business matures, it is likely to become an increasingly conservative stock.

So what might these sellers of ISRG be buying? If they’re looking for a revolutionary stock, some of them might be buying HomeAway (AWAY), which is the first in my series of Ten Best Revolutionary Stocks.

Here’s what analyst Mike Cintolo wrote when he recommended the stock in Cabot Top Ten Trader back in March.

“HomeAway is one of many relatively recent IPOs (coming public during the past 12 to 18 months) that has an improving chart, increased sponsorship and, most importantly, a great story that could drive earnings and margins much higher in the quarters ahead. The company is the Expedia of rental properties; while there’s competition out there (Airbnb), HomeAway is far and away the leader worldwide, with more properties (more than 700,000 and growing every week) and visits to its websites (which include by an order of magnitude compared to others in the field. It also has the top online rental sites in the U.S., France, Germany, Spain, Britain and Brazil! The firm has seen steady growth in its traffic and properties for sale in recent years; it makes money by charging listing properties an annual subscription fee, and with a renewal rate in the 75% to 80% range, most clearly feel the money is worth it. But HomeAway is now expanding options for property owners (many are professionals), and this should help pricing going forward; it introduced tiered pricing (higher annual payments for better search results, more pictures, etc.) late last year, which is already a hit. And later this year, it will offer a pay-per-rental option (about 10% of the rental), which should be attractive to owners who only rent their property for a week or two every year. All told, this is a huge market (there are millions of potential listings) with plenty of room for growth. We see many more years of strong sales and earnings growth.”

One thing Mike didn’t mention is his write-up is that while Airbnb gets paid by the renter, HomeAway gets paid by the property owner, most commonly on a regular basis, with yearly renewals. That seems to be the superior business model.

Another omission, and more relevant to today’s discussion, is the fact that HomeAway is not well-loved—many people don’t even know its name—which means there are tons of potential buyers of the stock!

Since Mike’s recommendation, the company’s first quarter report revealed a 56% gain in revenues and a 24% gain in earnings, while profit margins stayed fat at 15.4%. In the meantime, AWAY has climbed from 29 to as high as 34, but basically, it’s been in a trading range. Today, it pulled back to touch its 50-day moving average. I think this represents a decent setup short-term, and probably a great opportunity to get on board what has the potential to be one of the best revolutionary stocks of our time.

The weeks ahead will bring nine more of these revolutionary stocks, but if you really want ongoing coverage of the best stocks in the market, I suggest a no-risk trial subscription to Mike’s Cabot Top Ten Trader, which features 10 of the market’s most promising stocks, every Monday.

For details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Editor of Cabot Stock of the Month

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Best Revolutionary Stocks – 2013:

We introduced our series on revolutionary stocks with an example from a multi-million dollar company that started in someone’s garage...

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Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.