|Upticked made a great post on Yahoo! last night and it needs to be posted here as well.|
Guru's 5 things to look for . . .
I was reading about a successful stock guru, and when he was asked by the interviewer how he got interested in stocks, he replied that it wasn't that he was so much interested in stocks, but that it was the great story that fired him up. He said he got excited when he discovered some great product, a dynamic management, and something that has a competitive advantage. (Made me think of KVH.) He said discovering it early and understanding what makes it tick was the fun part.
"The principal thing that makes stocks go . . . is early discovery."
He said he was looking for companies with huge upside potential--the big home run. And he said to do this, you need a company that is so exciting, it will capture the imagination of other investors. He said that you could look at ten stocks that have the same profile, the same big percentage increases in earnings, but that the ones that will really move early on are the ones that have the great story.
The interviewer then said, "By the time you hear this great story, isn't it almost certainly all over the Street already?"
And I love his reply, because I think it fits KVH well. He said, "Wrong. It may NOT be all over the Street. There are over 10,000 publicly traded stocks in the U.S. Even if the new idea is all over the Street, it takes time for firms to do their homework, especially the large banks, advisors, mutual funds and others with huge bureaucracies."
He then mentioned that most of the companies they buy are between $100 - $750 million in market cap. He said, "We are generally initiating our positions at about $150 to $200 million." So, I got to thinking that with KVH's $89 million market cap, we aren't even on some institutional radar screens yet.
Then he said that his job was to capture the companies early on in that huge growth phase, when you've got only two or three regional firms following it. (Needham--the Lone Ranger) He said, then if you have a great product, great management, then you've got a company that could become a Microsoft.
Then the guru gave five things that he looked for in stocks, and said that you didn't have to have all of these, but you needed most of them.
#1: Dramatically accelerating earnings.
He said that he wants 30% to 60% growth. He said if you have the great story stock—big product, great management, great service--that this is going to drive those earnings so powerfully that it will substantially change the nature of the company.
"If you can capture that, you've got two things going for you. One, you have the increased price of the stock, because the earnings are going to go up 60% instead of 30%. So you get 100% greater price appreciation because the earnings are going up higher. And two, if you're right in your assessment of the company's growth, you're going to get a multiple expansion. The market is going to say, wow, this isn't a 30% grower anymore, this is a 50% grower. So you get a higher multiple [price-earnings ratio]. Two bangs for your buck."
#2 Strong balance sheet
No debt or virtually no debt. If there is any debt, he says, that there should be good cash flow.
#3 Strong relative price strength.
He mentions that it is the concept of how well is that stock acting in the market relative to all other stocks? This guy says that if the median stock in the market has a relative strength of 50, then he wants 80.
#4 Wants companies in industries that are doing well in the market price wise.
He says that if you look at the industry's group rank, its industry's relative price strength, you want that to be doing well too, because it's awfully difficult for any company to be doing well in an industry that is doing poorly.
#5 Low institutional ownership.
Guru says that he wants to be in the first wave of institutional buying, long before the majors are buying it.
He says that he wants the company's sponsorship to be young and small with limited brokerage coverage, because they want to be ahead of the big buying programs of the majors that will undoubtedly follow as other investors discover what he already knows—a potentially great company, a great investment opportunity in the making.
Does any of this remind you of a little company in Rhode Island?
All this reminds me to hang on for the long term and not be enticed by the first move up.