I didn’t ask him, but apparently the folks who subscribe to Louis Navellier’s stuff have been requesting something cheap that can boom “in as little as the next 30 days” … so he’s responding with a low-priced stock pick for his (very not-low-priced) Quantum Growth newsletter.
And, of course, he’s teasing the rest of us, the great unwashed, about his pick … in hopes that we’ll decide that ponying up five thousand bucks a year to get his idea sounds like a good deal.
How does he entice us? Here’s a taste:
“Without getting too technical, this cloud-computing juggernaut is a part of the “invisible web” that we only rarely think about.
“It’s the company that makes the software that multimillion-dollar companies use behind the scenes and that you use daily, like online email, web domain management, and advertising content management.
“The company is raking in the dough because of it, with sales climbing 19.5% while earnings jumped 450%—all as the company delivered another 1,000% earnings surprise.”
Sound good? We do love companies that surprise with their earnings. How about some more details about our secret “internet doubler?” Louis obliges:
“As you’ll read in Quantum Growth, the company is applying its behind-the-scenes software applications to take the wireless industry by storm, too.
“All by using a “pay as you go” wireless phone plan that comes complete without data caps, contracts or termination fees. In fact, the company will even pay your termination fee to switch over!
“What’s more, it offers (surprise, surprise) online web management that lets you mix and match data and calling plans and receive credit for services you don’t use. The result is saving its customers about $100 a month.
“That’s how it has been able to steal market share from the likes of AT&T, Sprint and Verizon.
“All without the pricey contracts, hidden charges and shoddy service many of the big-name carriers are known for—all for about half the money.
“So it’s no wonder the company is making money hand over fist, and why the company is buying back 10 million shares.”
OK, so it’s somehow worthy of the investor-loving “cloud computing” connection, it sells “behind the scenes” software for key operations like email, web domains, and advertising … and it offers a pay as you go mobile phone product?
Well, that’s a bit of an odd combination … but it, along with those numbers above (450% earnings growth, 19.5% revenue growth, 1,000% earnings surprise, share price around $1.40) does give us just the right amount of data to shovel into the ol’ Thinkolator.
And the answer comes out, nice and clean and shiny … this is domain name registration pioneer Tucows (TCX)
Never heard of ‘em? They’re fairly well known in techie-land, though they’re not exactly a juggernaut — they were one of the light-hearted pioneers of domain name registration in the early days of the Internet, helping folks set up their own websites and email servers and the like … and that’s still the majority of their business (though what sets them apart is the relatively large part of their business that’s “wholesale” — they enable small internet service providers to build businesses fairly easily on their own by reselling their services, software, and domain registration.)
And yes, they did just launch a prepaid mobile service in February of this year — though that thing about the company paying your early cancellation fee to switch to their service is a marketing bit, they’ll do that for one customer per day as a sweepstakes contest.
And yes, they do have a 10 million share buyback program in place — or close to it, it’s actually a $10 million buyback, which would be less than ten million shares now that the price is well above a buck. They bought back about seven million shares in a dutch auction back in January, too, so they have been reducing the share count (which helps with per-share numbers like earnings).
The annual revenue for 2011 does match the tease — though the growth, from 22,077 to 26,370, was actually an increase of 19.4% instead of Navellier’s 19.5. Close enough.
And profits? Well, technically it’s a match — earnings per share did jump from two cents in the fourth quarter of 2010 to eleven cents in the fourth quarter of 2011, which is a 450% increase … but that’s mostly because of a one-time tax benefit that generated more than half of that income (and, frankly, the tiny numbers involved and some continuing buybacks also mean that the per-share numbers overstate the growth even more — the actual income rose about 390%). Though, in their defense, if you take out the six cents in tax benefit they did still grow earnings per share pretty nicely, by 150%.
To make the “earnings surprise” come out at 1,000%, you do need to include the six cents in one-time benefit that they recorded for “tax asset valuation allowances” — since the estimate (from the ONE analyst who covers the stock) was for one cent and they reported 11 cents, that is indeed a 1,000% surprise … though the reasonable aggregators of data will report it as a 400% surprise, since they back out that six cent one-time benefit that analysts hadn’t been baking in to the numbers.
Still, earnings surprises are good even if you don’t have any particular reason to give great weight to the single analyst’s expectations. You can see all that data, by the way, in their 2011 results press release — and you can see their more recent performance in the first quarter announcement here, which also brought decent increases (revenue up about 22%, net income up 50% once you account for another one-time benefit — a sale of an “intangible asset with no book value”, in this case).
The company’s argument on its own behalf is that they operate a very scale-able business, with the leverage allowing for substantially higher profitability once they get the revenue churning even a little bit higher. That’s logical for a company that’s largely a wholesale provider of back-end services for small internet service providers, though I don’t know if that will hold true if they’re going to put in the massive marketing spend that would be required to make any kind of a splash in the mobile phone business. They seem to be pretty reasonably valued with both trailing and projected earnings giving them a PE ratio of about 10, and they have enough revenue growth that they should be able to continue to grow earnings if they are indeed going to be as efficient as they believe going forward — and if you want to apply a broad brush of analysis, buying a company whose earnings are growing at all is reasonable if you can get them for a PE of 10ish.
That said, we don’t want to rely too much on analyst estimates since there is only the one analyst, and we have no idea how much attention he’s paying (I haven’t checked, but when a company with a market cap of $58 million like this even has analyst coverage, it’s usually because the analyst is from the same firm that’s advising the company in some way, or helping them with buybacks or public offerings — companies this small don’t warrant analyst coverage as a general rule). And the stock, though it is very low-priced, is also higher than it has been at any point since the bursting of the internet bubble (yes, Tucows is one of those washout survivors — and they’ve staggered along for the past decade with a share price under a dollar almost the entire time).
I actually just got distracted by browsing over at Ting’s website (Ting is the name of the mobile phone service that Tucows is launching) — sounds like a great idea, sell phones at reasonable prices without huge subsidies and do “pay as you go” for everything, no contracts and no “unlimited” anything. I imagine it would save money for a lot of typical customers, though I haven’t checked for my own usage — they use the Sprint network, and they’re very unlikely to always have the hottest phones (even assuming that you would be willing to pay $500-700 to get the latest iPhone or whatever without a contract), but it is a nice, clean approach. Whether it will turn into something big and make money for Tucows, I have no idea — though since they are selling the phones upfront it will probably boost their revenues and hurt their operating margins in the near term compared to past quarters (since they basically sell phones at break-even and every customer in the first year or so will be a phone buyer since they’re new and you have to buy their phone to use their system, that means the low-margin device sales will be a big portion of revenue and the high-margin service sales will be a small portion until their user base builds up).
So … interesting, a company that has been fairly boring for a decade but a stock that started to break out a bit in recent months. Reasonably valued, though it’s tiny and will be quite volatile and it’s not really “surprising by 1,000%.” I don’t know if there will be a quick double in the shares, but I’m certain this is the stock Navellier is touting for his $5,000 service.
P.S. If you like learning about this kind of stuff and you’re new here, please consider signing up for our special premium membership in the Irregulars — we probably won’t make your rich, either, but we’ll share some interesting ideas … and membership costs 99% less than Navellier’s Quantum Growth.