Watch the Cradle
Summertime Book Suggestions
Earnings Reviews ... and Previews
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A few years ago, cradles and lawnmowers were the furthest thing from my mind ... and my friends’, as well. But I’m now at the age where every few months, another goofy friend that I’ve known for years reveals that he’s going to be a father. Crazy! In fact, one of my recent conversations included a talk about my soon-to-be new house and some of the landscaping I want to do, while my buddy talked about how he was recently in the town I’m moving to ... shopping for a baby carriage. Age, it seems, is catching up to me.
However, though none of us can stop father time; as an investor, it always pays to stay young at heart. By that, I mean you should always focus on what’s young, new and fresh on the scene. And one of the best ways to do that is to keep track of hot initial public offerings (IPOs).
There are usually at least a couple of IPOs per week; most are nothing to write home about, but every now and again you get a Google (2004), VMWare (2007) or Visa (2008), not to mention smaller glamour stocks like First Solar and Crocs (both 2006). These days, however, the situation is different. Because of the historic bear market, the IPO pipeline has not only dried up, it has vanished; there were literally just a couple of IPOs in the entire market between last summer and March!
The result is that there are very few IPOs to follow right now. That’s both good and bad--good, because that means there’s a limited supply of new shares, which will help drive prices higher, but bad because there are fewer potential leaders to latch onto than there would be otherwise.
The good news is that the IPO business is s...l...o...w...l...y coming around, and two fundamentally intriguing firms have recently come public.
One is Changyou.com (CYOU), and this one has big potential. It’s a Chinese online game operator, and that sector is one of the strongest in the market. (Shanda (SNDA) and NetEase (NTES) are two other super-strong group mates.) Revenues at Changyou soared 379% last year and earnings jumped to $2.11 a share. The only potential problem is that most of its business comes from just one game. But more games are being developed, and the stock is consolidating south of 29. If it does that for another week, and then breaks out, it could be ready for a big run. Interestingly, the stock is valued only at 13 times earnings, which could be an added plus. Earnings are due out next Monday.
The other stock, which I admit I haven’t done enough research on, is Rosetta Stone (RST), the language education firm. You might have seen the company’s kiosks in various malls (I know there’s one in the Prudential Mall in Boston), and its claim to fame is easy-to-use, interactive software that helps people learn a new language. Obviously, English is a big deal in this industry, and in fact, the company has a classroom product that addresses the English-as-a-second-language market. But Rosetta’s software can teach 30 different languages, and there’s mass market potential here. We like that sales are up 57%, 72% and 54% in the past three quarters. The stock just came public two weeks ago, so it’s very early. But it’s worth watching; a jump above 29.5, possibly on earnings (due out May 11), would be great.
Regardless of whether CYOU or RST succeed or not, you should keep an eye on the new issue market. If my hunch is right, more exciting names will be coming public in the months ahead, and some of them will turn into dazzling market leaders.
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The weather has finally turned nice here in New England, with a consistent string of 60-degree days and a couple of scorchers thrown in (we set records on Tuesday, with temperatures north of 90 degrees!). That means it’s nearly vacation time! And with vacation comes reading; I’m always on the lookout for good books, investment or otherwise, to help me unwind while I watch waves lap against the sand.
Since this is a wealth advisory, of course, I’ll offer up some of my favorite investment-related book recommendations. Heck, I might even re-read one or two of these this summer. Here are some favorites:
“Reminiscences of a Stock Operator": My favorite book, which I’ve read many times, was written by Edwin Lefèvre. It’s the fictional biography of Jesse Livermore and many of his escapades, both good and bad. Not a step-by-step book on how to get rich, but if you fancy yourself a student of the stock market, you must read this book.
“How to Trade in Stocks": This was actually written by Jesse Livermore, though it’s been republished and expanded a bit. Again, it’s not a step-by-step instruction manual, but it is more specific in some of the tactics Livermore used.
“The Successful Investor": This one, by William O’Neil, is more of an instruction manual, which makes it longer to read (and hence, might not be the best for a beach trip). But if you read it, you’ll find many of the same principles Cabot’s growth publications adhere to.
“Hedge Hogging": This one I read just last summer (on my honeymoon!), and I was planning on reading it over a few days ... but it only lasted three. It instantly became one of my favorites. It’s basically about Barton Biggs’ (the author) attempt to start a hedge fund, and all the work that goes into it. However, it’s really a compilation of short stories and experiences he’s had in the investment world. I loved this book!
“Confessions of a Street Addict": Author Jim Cramer has a few recent books that I’ve perused ... and am not that impressed with. (To each his own, though.) This book, however, was his first, written years before he became a TV personality. It’s basically about his life as a hedge fund manager; there is a three-chapter section about his dealings during the 1998 financial crisis (Russian ruble, Long Term Capital Management, etc.) and bear market that might be the best three chapters I’ve ever read.
“The Perfect Speculator": This book is a follow-up to author Brad Koteshwar’s first book (called “The Perfect Stock,” which was actually about TASER). It basically involved Koteshwar’s interactions with a fellow named Boyd Hunt--honestly, I’m not sure if this is a real person, but bear with me--and Hunt’s lessons of how he made it rich in the stock market. I wouldn’t say it’s the easiest read out there, but it has many great tools to add to your arsenal.
“Market Wizards": I’ve mentioned these books before--there are three of them (the first one was written in the late 1980s, the most recent around 2000 with an update in 2002) and each feature a bunch of great interviews with successful investors. Jack Schwager is the author of all three; the last of the three (called “Stock Market Wizards”) focuses exclusively on stock investors.
I’m hoping to add more names to my “favorites” list in the months ahead; you can be sure I’ll be draining Cabot’s bank account looking for new writings and teachings. When I find some, I’ll let you know!
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In my last Cabot Wealth Advisory, I wrote about how earnings season could be the launching pad for many leaders. Correct! I’m now seeing many stocks with real growth stories shooting ahead after stellar reports (not just turnaround plays that are reporting “not as bad as we thought” earnings). And two of them I wrote about in my last issue--Amazon (AMZN) and Visa (V).
Amazon reported first quarter revenues of $4.89 billion, up 18% from a year ago, which is very impressive given the horrific economy. Earnings jumped 21% to $0.41 a share--not the fastest growth in the world, but that number beat estimates by 10 cents a share, and again, a big retailer producing 20% growth during the first quarter’s economy spells big potential going forward.
Really, though, Amzon’s sexiness has to do with Kindle, and by all accounts, sales of the e-book reader were great. AMZN reacted well to earnings last Friday, but has pulled back this week. I can’t say this is my favorite stock in the market, but I do believe it’s a liquid leader, and with retail stocks generally acting well, I think it can be nibbled at around here, or on weakness; the 50-day moving average (at 72) should provide support on any further pullback.
Visa (V) also had a good quarter (it just reported last night). The most impressive thing to me is that earnings of $0.73 a share not only beat estimates by nine cents, but was up 40% from a year ago ... and that up from 37% growth the prior quarter. Acceleration! The stock broke through some key resistance in the 60-61 area this week and while the company also announced a shelf registration in the weeks ahead (i.e., it could offer shares, which could temporarily depress the stock), I think the stock is a good buy anywhere in the low- to mid-60s.
As for next week ... keep an eye on Coinstar (CSTR), which operates the Redbox DVD kiosks, which you might have seen at your local convenience or grocery store. I’ve used it, and it’s cheap ($1 per night) and easy (you can reserve your movie online and return it to any Redbox kiosk, not just the one you rented it from). Coinstar’s earnings have been declining, but big growth is forecast starting in the second quarter. Earnings are due out next Thursday; if the stock breaks above 35.5 after earnings, it should be a good buy.
All the best,
Mike Cintolo
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