Newsletter publishers take advantage of catalysts, and what bigger catalyst could there be than a major political change? The Trump election surprise has inspired a whole raft of “buy this stock before President Trump takes office for big gains” and, if past is prologue, we’ll probably find that the catalyst and the Trump impact and the importance of buying at a particular predicted moment are highly exaggerated…
… but that doesn’t mean we’ll ignore these teaser pitches, of course. We’re interested in sniffing out investing ideas anywhere, and we also know that taking away some of the instant greed-lust incentive (I must subscribe to find this stock name now!) will give our readers a chance to think about new ideas touted by investment newsletters in a more patient and balanced way… which is usually a good thing.
This time, it’s our old friend Louis Navellier on the hustings, looking not for your vote but for your subscription dollars ($495/year for his Emerging Growth newsletter).
Navellier’s big picture is probably not a surprise:
“In the weeks since Donald Trump was elected, we’ve seen the Russell 2000 rise 16.13% as the S&P 500 rose just 6.13%. That spread in performance between small caps and large caps is the largest in 14 years.
“We see that spread growing even wider and even more favorable for U.S. small cap stocks over the next six months….
“The reason is simple: Investors are banking on lower taxes, more favorable trade deals, less regulation, and pro-U.S. business policies that will reduce their costs and increase their earnings and send stock prices soaring.
“And those are just three reasons small cap stocks will zoom in 2017, thanks to the Trump Effect.”
And then, of course, we get to the secret stock that Navellier drops some hints about:
“Let me tell you about one of our top picks now.
“It’s an incredibly exciting opportunity, with a White House connection that virtually ensures a double.
“Best of all, it’s just the first of 10 stocks that are set to double your money in 2017 thanks to the ‘Trump Effect’ that’s cresting across Wall Street.”
And then, to get the Thinkolator interested, we start to learn a little more about this $8 stock…
“… the Internet rules the world, and bandwidth… is the lifeblood of the Internet, enabling e-commerce, online research, data storage, file sharing, cloud computing, and much more….
“The analysts at Gartner now project 20.8 billion devices will be connected to the Internet by 2020, not including the billions of connected smartphones, tablets, and computers.
“All of which will increase the demand for greater bandwidth—not only for companies like Facebook, Google, Amazon, and YouTube—but for every small business and computer user on the planet.
“The increased demand creates bottlenecks that slow down network performance that affects the bottom line of all businesses.”
So this company is, apparently, somehow involved with bandwidth. Clues?
“… this $1 billion company makes the superfast 100 gigabit (100G) optical networks and high-speed connections for streaming video, voice over IP, cloud computing, and other applications.
“As such, their products are at the heart of the Internet superhighway, including tunable lasers, receivers, and modulators that increase their customers’ network bandwidth, prevent bottlenecks, and allow customers to run new and exciting applications at blazing fast speeds.
“In fact, the company’s products are so well regarded that they have received the coveted ‘2016 Excellence in Emerging Technology’ award from Cisco….
“The company enjoyed 55% revenue growth year-over-year from Q1 FY17 while gross margins rose 34% and non-GAAP operating income rose 15%….
“… has a cash balance of $229 million and essentially no debt.
“If you’ve invested in our small cap stocks before, then you know that I salivate when we identify small caps that are growing their sales and earnings but do so with plenty of cash to expand and no debt….
“… the company has not only enjoyed revenue growth of 55% year-over-year but also delivered four consecutive double-digit earnings surprises in a row.”
So that is probably what really perked up the ears of the automaton behind Navellier’s quantitative screening systems — his services are focused on finding stocks with earnings surprises, analyst upgrades, and momentum in both stock price and financial fundamentals like revenues and earnings.
What, then, is our little $8 stock? He says it has already gone up 152% in the past year and sees “no reason why this small cap juggernaut couldn’t double in the next 12 months.” And the Thinkolator sez this is… Oclaro (OCLR)
Oclaro has been around for almost 30 years and was a pioneer in optical networking, though it has also done so many renaming and reorganizations over the past 15 years that it’s a little tough to parse your way through their history — the Oclaro name came from the merger of Bookham and Avanex back in 2009, and then the next big jump was the combination of Oclaro and OpNext in 2012, but the current company also includes pieces of what were once divisions of Marconi, Nortel Networks, Alcatel, Hitachi, Avalon Photonics, and Cierra Photonics.
Which is, if nothing else, a good reason to admit that I don’t know much about the competitive positioning of the companies in the optical networking business… all I know is that there have been several periods of massive tumult in this business, mostly caused by fiber overbuilding in the dot com bubble years and crashing demand in the dot com bust years.
What’s the current status of Oclaro? Well, it is an $8 stock, it does have about $229 million in cash and cash equivalents, and the market cap is still pretty small at about $1.3 billion.
They have had very few profitable years in the past decade, and the revenue has only doubled since 2007, so browsing through their financials for the past ten years makes it seem like the company is pretty moribund. They’ve had up and down years, but have never established any real trends boosting efficiency, profitability, or even growth…. they had a nice period in 2009-2010 when they hit profitability on the original Bookham/Avanex merger and revenue peaked to around $400 million, then the revenue dropped substantially again, they did another merger, and revenue got up above $400 million again and they’ve built up to being just barely profitable over the past year or so.
That gives me the impression of a company that can be profitable when things go well, but also that their profitability has never, in the past, been sustained for long, and their only real big chunks of revenue growth have come as a result of major acquisitions/mergers. I don’t know whether or not Navellier will be right when he says that Peter Thiel’s seat at Donald Trump’s table means that optical networking infrastructure will get a big piece of future federal stimulus investment, or whether Oclaro will get a big chunk of that money if it does come through, but analysts are predicting sustained profitability — they see Oclaro earning 52 cents in 2017 and 61 cents in 2018, which is basically a prediction that earnings will rise by about 20% a year for the next couple years. At $8 the stock is trading at a forward PE of about 15, so that’s a reasonable price if that kind of growth does happen, and it’s a small discount to the forecast for the broad market (S&P 500), which has a forward PE of 17.5.
So by that measure, it’s certainly not a ridiculously overvalued stock… but analysts also do not have the same kind of optimism as Navellier about this particular pick — which might be good, since much of what Navellier looks for is “earnings surprise” momentum, and Oclaro certainly has that after beating earnings expectations quite dramatically in each of the past four quarters… the only caveat there is that it’s easy to beat earnings estimates dramatically when analysts estimate you’ll earn one cent and. you earn three cents — that goes in the books as a 200% beat. It gets tougher when you get into sustained profitability and you’re maybe earning 18 cents versus an estimate of 15 cents for a much less dramatic “beat.” These kinds of growth stories look much more fantastic when they are first breaking through into profitability after losing money or breaking even, than they do when they are in the second or third year of earnings growth.
And with that, I’ll leave it to you to jump into Oclaro’s numbers, researchify, and let us know if you see parts of the story that indicate strong future growth for investors — or if you fear a fall back into the weak periods they’ve had in the past. It certainly was a company that went from very weak to “surprisingly good” over the past year, and that helped drive the stock to more than a double, but whether the next stop is $4 or $12 will depend on a future that I can’t see very well… I’d be delighted to hear what you learn, just share your thoughts with a comment in the friendly little box below. Thanks for reading!