In Part Two of our interview, Kier McDonough of Brigos Capital Management discusses five companies with strong businesses that are in growth mode. He explains his method of screening for great performers, and then investing during a market uptrend.
Kate Stalter: Kier, with all the stocks you’re talking about here, you are not necessarily saying go buy these right now. When a lot of people talk about stocks, that’s what they’re saying. Talk about some of your caveats when you mention a watch-list name.
Kier McDonough: Sure, these are not recommendations. I’ll start with that, but these are stocks that I have on my watch list right now, saying I’m waiting for the market to confirm that it’s in an uptrend.
I’m a trend follower, and right now we don’t have a clear-cut trend. What I’ve noticed is that leading stocks—stocks with the best fundamental stories, the best new products, the best services—these are the ones that tend to outperform the market when you get into a good trading environment. And oftentimes these stocks will go up two, three, five times what the general market will do.
That’s why I concentrate on these, because they can really outperform. Think of it like sailing: You say it’s easier to sail or you go fastest when the wind is at your back, and that’s what I’m looking for. I’m looking for the general market to be in a solid uptrend and the leading stocks are the ones that outperform the most, and that’s where I’m concentrating.
Kate Stalter: Let’s look at a few other leading stocks from some other sectors. How about tech? Anything in that area that you like right now?
Kier McDonough: Sure, sure, there are a few names I like there. I think the social media area is relatively new. There’s two big names in that space that I like: LinkedIn (LNKD) and Facebook (FB). Both are very disruptive companies and they are leaders in their respective space.
LinkedIn...I’ll start with that one. They have a pretty easy growth story to understand. It’s basically Facebook with a suit and tie. It’s basically hiring services, advertising, premium subscriptions. They’ve had triple-digit revenue growth and very, very strong earnings growth. They’re really changing the way people post and update their resumes. It’s also more important as the way that people look for new hires.
Kate Stalter: That’s one where a number of analysts and even people in the general public have been able to understand how that company makes its money, which is not always the case with some of these social media companies.
Kier McDonough: Well, the good news is they are making money, and the part about this is it’s very disruptive. Before, people used to use Monster.com (MWW), and they’re basically putting themselves up for sale because LinkedIn has come in and really changed the dynamic.
People pay subscription prices to get access to the database, and that’s where they make their money. They’re expanding into other areas or expanding into other countries. So as the economy hopefully improves, there’s more hiring that goes on, these guys are right there at the forefront.
Kate Stalter: Talk about Facebook. That’s everybody’s favorite whipping boy right now, and it sounds like you’re saying that could be an opportunity people are overlooking.
Kier McDonough: Indeed. What I look at is, any company that has 900 million users worldwide is doing something right. If they’re able to monetize this—and I think they have some pretty smart people over there—if they’re able to monetize their business...and think of all the information they already have about their subscribers and being able to tailor information to marketers.
My personal feeling is there’s a lot of upside on this. What I do is a lot of precedent analysis. I’ll look at companies that were revolutionary when they came public, and I’ll look at their charts and how they traded.
To give you an example, eBay (EBAY), I’m using as a precedent here for Facebook. They came public back in 1996. The market was having a difficult time. After eBay went public, it corrected 50%. Once the general market began to move higher, eBay broke out and went on a powerful move.
Right here we saw [Facebook]...it was everybody’s favorite stock to hate, no question about it. The stock corrected about 43%. It’s starting to round up in a base at this point, kind of a U-turn type base, and I’m keeping an eye on it. Again, if it gets its legs underneath it, I think institutions will gravitate towards this thing. Because if you look at the earnings growth over the last three years, it was triple digits.
|pagebreak|Kate Stalter: With Facebook, it seems to be that there’s almost some delight in some of what happened with the botched IPO, and it seems that a lot of people might be stuck on that part of the story.
Kier McDonough: And that’s OK. Who drives the market are the institutions. They represent 70% or greater. That’s the mutual funds, hedge funds, insurance companies. They control the assets. I don’t think they’re so media-driven. They really look at, “I want to own companies, the best companies I can find with unique products, unique services.” And Facebook certainly has that.
Kate Stalter: How about any maybe older school, more established e-commerce or online retailers? Anything in that space right now?
Kier McDonough: I like Amazon (AMZN) quite a bit. I really do. I mean, the company has been investing heavily in their business over the last several years, building all these fulfillment centers, and they’re expensive to put on. It’s really hurt their bottom line in the short term.
Now, sales, on the other hand, have averaged almost 40% a year over the last three years. This is a company with a market capital of $100 billion with sales of $51 billion and they’re still growing it north of 35%. That’s strong.
So, for me, I think eventually all their...I never doubt Jeff Bezos. I think the guy’s a great manager, and I don’t know anyone who doesn’t use Amazon. That might be another approach on this. Using the Peter Lynch “invest in what you understand and what you use.” I’m an Amazon user. I know lots of people that are.
On a technical level, the stock’s been building a base for quite some time, and it’s very orderly. Again, I think if we get an uptrend in the market that’s sustainable, I think Amazon could launch out of this right here and be one of the leaders in the market.
Kate Stalter: It seems that in addition to its strength in shipping actual goods, it’s been a leader in the digitization of media, and understanding how to make money from that.
Kier McDonough: Sure, sure. They’ve been able to move on to new segments. I mean, this was originally just a bookseller, and then they’ve moved in to so many other areas—media, electronics, general merchandise. They have a marketing machine, they really do.
I think they’ve built such a moat around their business, it’s going to be hard for anyone to unseat them. Even if the sales tax goes into effect in every state in the country, I still think people are going to shop here, because it’s a trusted vendor.
Kate Stalter: Right, and it’s convenient. You push a button and you buy your stuff. Now speaking of retail, you had mentioned consumer discretionary. Anything else in there, maybe more brick-and-mortar stuff that you’re looking at right now?
Kier McDonough: Sure, there’s another recent new issue, Michael Kors (KORS). They dominate the luxury brand in apparel, handbags, fashion accessories.
They’ve been growing pretty rapidly too. Just in the last quarter, Q1 of this year, they put in 71 new stores. The stock came public at $20, ran to $50 in 13 weeks and basically it’s been building a base ever since.
It’s really setting up its first opportunity for growth investors to be able to buy it coming out of a solid consolidation, and I really like the story. Sales have exceeded 50% in each of the last nine quarters.
Kate Stalter: You had mentioned recent IPOs and the strength in that sector. This is something that falls into that category as well.
Kier McDonough: It does, absolutely.
Kate Stalter: Any other sectors that might be surprising, that people aren’t aware of right now that maybe they should be looking, that they just think are so beaten down that they’ve given up for dead?
Kier McDonough: Sure, anytime you get a new market rally, it’s usually three-quarters of the stocks are growth stocks, and about a quarter of them are industries that they might have been out of favor that are coming back in favor. In this case, one of the groups that I’m really concentrating on are the housing stocks. One in particular is Lennar (LEN). Earnings should be up about 200% this year and over 60% next year.
Now, there seems to be a pent-up demand to form new households. It also looks like the industry conditions are improving, and I think Lennar is right there. They’re a very good builder. They already capitalize on it.
There’s a number of other stocks in the group that look good, but I’m just concentrating on Lennar right here. The stock ran from $12 last fall to $30 here in May. It’s done a very nice job digesting this move. Pulled back only about 22%, which is pretty nice after that kind of a move, and I think it’s poised to move higher.
Also, when I do my sector work, I’m looking at the building-residential group. It is one of the top three groups right now as far as relative strength.
Kate Stalter: This reminds me in a way of what we were just talking about with Facebook: A situation where individual investors really need to understand what the fundamentals, what the charts are showing them, and disregard what their opinions or the media might be telling them.
Kier McDonough: No question. The charts don’t lie. The charts show supply and demand as it’s occurring. Oftentimes I’m looking at the broad industry. I’ll look at the ETFs for those groups and see how they perform, and then I’ll drill down to find out what are the leading stocks inside of those ETFs to help me really focus in on the leaders.
Kate Stalter: You’ve covered a whole lot of ground today. Any final words of wisdom for retail investors who might be kind of gun-shy right now, not sure what they should be doing?
Kier McDonough: Sure, basically just follow the general trend of the market. Try to invest in companies that you understand that have products—Apple’s (AAPL) a great example—that many people out there have bought, from iPods to iPhones to the iPads.
If you had gone in to one of those stores and had seen how busy they are, you might have decided, “Let me take a look and see what this stock looks like on a chart and look at the earnings.” That’s part of how you invest for trying to find some big winners, is find companies you understand that have products that are unique that are dominating their markets.
I think that’s a big part of it. Do your homework is a big part of what this is.
Related Reading:
https://www.moneyshow.com/articles/GURU-28110/2-Stocks-In-Potentially-Bullish-Setups/
https://www.moneyshow.com/video/VideoNetwork/100/7816/The-Only-IPO-Thats-Worth-the-Hype/
https://www.moneyshow.com/articles/DAYTRADERS-28392/3-Social-Media-Stocks-with-Real-Buzz/
https://www.moneyshow.com/articles/TEbiwkly08-24280/How-to-Get-Started-in-Chart-Reading/
