As a Registered Investment Adviser, we have a fiduciary responsibility to our clients to achieve the best possible returns over the long-term. Doing so requires vigilance. For us, this means identifying inflection point stories ahead of others, vetting management, and timing the ideal entry and exit points of our investments. Being vigilant also requires consistently examining how we can better our game. To do this successfully, we continually strive to identify areas of weakness in our methodology and then determine how to ameliorate, if not eliminate, them.
Our biggest area of weakness in the first half of this year related to the timing of certain trades. For example, we allowed ourselves to get swept away by the overwhelming increase in social interest surrounding Hunger Games. Although fully aware of how much Lions Gate's (LGF) stock had run up ahead of the HG release, we nonetheless believed that the incredible amount of social media swelling into the opening weekend would translate to a soaring stock price. We were late and wrong. We got emotional. Instead of fading the hype, we got swept away by it, resulting in a frustrating trade.
While there were some other frustrating moments during the first half of our year, our trade in LGF really stood out. This led us to the following question: what new tool could we add to our trading arsenal to prevent us from repeating this mistake?
Over the past five years, Seeking Alpha has become an invaluable source of research for us. During this time, we have also enjoyed being one of the many contributors to the site. Because we measure the success of our trades over weeks and months, as opposed to the hours that certain day-traders employ, we have chosen to ignore investor tweets from Twitter. They are too short-term-oriented for us. Instead, our search for an edge comes from conference calls with management, daily research from our brokers, market data from IBD and Marketsmith, and information gleaned from respected authors on Seeking Alpha.
As we reflected upon where we went wrong on the LGF trade, it dawned on us that we could have handled it better if we had also been tracking the social interest that had been building on Seeking Alpha in the weeks leading up to the trade. How could this have been done? Well, it turns out, very easily. Let us explain.
Upon entering a stock symbol in the upper right section of the main page, an investor is led to a dedicated page of research on that stock detailing recent articles, press releases and conference call transcripts. In the middle of this page, Seeking Alpha also highlights how many people currently receive email alerts on this particular stock. In and of itself, this simple piece of data is not that important. Nonetheless, what if this data point were utilized to track the social interest in a stock?
For instance, as of the writing of this article, there are 879 people who receive email updates on LGF whenever a new article is published or a transcript is downloaded to the site. What if we had created a spreadsheet and updated this simple piece of information for Lions Gate once a week for the two months leading up to the release of Hunger Games? Would a surge in the number of people tracking LGF's stock have given us a clue that the stock had reached a climax? Based on data we have collected over the past few weeks on other stocks, we suspect the answer to these questions would have been a resounding yes.
Since late last year, a number of formerly high-flying growth stocks have seen not only their stock prices peak but also their levels of social interest on Seeking Alpha wane. Here are some examples:
- Acme Packet (APKT) is down almost 40% year-to-date. The number of people receiving email alerts on APKT is currently 667.
- Mitek (MITK) is down almost 50% year-to-date. The number of people receiving email alerts on MITK is currently 483.
- ZAGG Inc. (ZAGG) is down almost 35% off of its 52-week high hit last fall. The number of people receiving email alerts on ZAGG is 1,014.
It seems as though these three stocks and LGF have two things in common. First, their stocks all moved higher by 100-200% in the past eighteen months. Second, it appears that their levels of social interest on Seeking Alpha peaked between approximately 500-1,000 people. We can draw a couple of important conclusions from this data:
- Newer growth stories have a limited amount of investors interested and willing to bid them up. Be careful when everything looks rosy as it did when LGF topped out this spring.
- Monitoring social interest in newer growth stories may offer investors the most value. Unlike blue chips such as Coke (KO) and IBM (IBM), which both have almost 7,000 people monitoring them, growth companies at inflection points will be frequented by less sticky, long-term money. Tracking the week-to-week and month-to-month social interest in these names will therefore carry more weight.
- Be wary of growth stocks that have already had a massive move higher and have also seen social interest in their stories spike quickly to between 500-1,000 people-buyers may be drying up.
With this data in mind, we have identified ten growth stocks and inflection point plays which we feel will see a surge in social interest on Seeking Alpha over the second half of this year. Hoping to test out our theory on how important the 500-1,000 "interested investor" level is we chose ten stocks which have an average of 150 investors already receiving daily email alerts on them. Each month we will present an updated spreadsheet detailing which stocks are seeing a move higher in their social interest. If we are right, the best acting stocks will most likely also benefit from increased social interest in their stories. Here are the ten names we are tracking:
- Abtech (ABHD.OB) - 79 Interested Investors: We expect contract wins within the stormwater, fracking, and industrial verticals to act as a big spur for Abtech's shares this summer and fall. The time has come for the company to deliver on its promises to investors by announcing contracts of significance this summer. Assuming they are successful, we expect to see a dramatic surge in social interest correlate with a stock price that could quickly double by the end of the year.
- Acacia Research (ACTG) - 143 Interested Investors: Considering that Acacia has moved higher by 1,000% over the past three and a half years, we are surprised that the company only has 143 investors receiving email alerts. We feel this will change by year-end as new investors gravitate toward a company that is becoming the dominant player within the patent licensing space and one that could easily see revenues scale to $500 million and earnings to $4-$5 a share.
- Authen Tec (AUTH) - 287 Interested Investors: Authen Tec, a provider of network and mobile security solutions, could see social interest in its stock soar if the company's biometric sensor is chosen for the iPhone 5. Should this occur, AUTH's stock would soar into the low-to-mid teens very quickly and immediately become a new institutional darling. Even without such a contract announcement, the company has been preparing for its inflection point moment for the past five years. We expect social interest to grow in the name even without Apple, with earnings expected to grow 150% between 2012 and 2013.
- Emcore Corp. (EMKR) - 164 Interested Investors: Although still a couple quarters away from profitability, we see a tremendous amount of value in Emcore's shares at current levels. With the optical sector poised for a rebound late this year as operators migrate to 100-G, we expect Emcore's biggest customer, Ciena, to eventually grab sizeable market share. Emcore's tunable laser product will see a surge in demand as soon as 100-G heats up. Expect sophisticated investors to show incremental social interest in the stock well ahead of this product ramp.
- GoldField Corp. (GV) - 134 Interested Investors: Goldfield, a provider of electrical construction and maintenance services to the utility sector, appears poised for a break-out year after securing a $50 million contract in February. With two quarters of positive earnings under its belt and a $70 million backlog entering this past quarter, we see the company posting earnings of $.40-$.50 this year. Put a 10X P/E on $.45 cents in earnings and you get a double from here and plenty of room for additional social interest to develop in the name.
- Kandi Technologies (KNDI) - 213 Interested Investors: When most investors think about electric vehicles, they understandably think about Tesla (TSLA). On the other side of the world, a fledgling start-up called Kandi seems close to securing a major contract for a 20,000 electric vehicle program in Hangzhou, China. Should the company land this contract, this would quickly change the complexion of the company and the stock could quickly double from current levels.
- LeapFrog (LF) - 280 Interested Investors: With the new LeapPad 2 scheduled to hit shelves this August, we expect LeapFrog to enjoy an extremely strong Christmas season. Estimates seem too low. Should the company surprise handsomely to the upside, the potential for $1 in earnings could be very real. Even if earnings only beat current estimates by 20-30%, this should be enough to thrust the stock higher by 30% into year-end.
- Neonode (NEON) - 260 Interested Investors: With its disruptive touch technology, Neonode has begun to gain share in the touch screen market. We continue to feel that the company's true inflection point will be reached in the fourth quarter. The company should then post a number of impressive top-line and bottom line results throughout 2013. If management delivers, we expect interest to swell in this name by year-end.
- Synergy Resources (SYRG)- 126 Interested Investors: Was that the bottom for oil late last week? Even if it wasn't, we expect Synergy's shares to attract new institutional interest in the coming months. With its significant undeveloped Colorado acreage providing a future catalyst for a higher valuation, social interest should begin to trend higher by this fall. Earnings are expected to double to $.61 a share for the August 31, 2013 fiscal year. Even with investors only attaching an 8X multiple to these estimates, this would equate to a $5 stock by year-end.
- Top Image Systems (TISA) - 101 Interested Investors: Long thought of as a distant second to Mitek System, we now see Top Image Systems emerging as a major player in the U.S. mobile check deposit market. Early last week the company scored a major coup by securing CheckAlt as a new customer. CheckAlt is one of the premier providers of automated and electronic check transaction processing. Previously the company had a relationship with Mitek. With $.40 in guidance already given for 2012, any incremental revenue from the U.S. should only provide upside to earnings in the second half of the year. If the company can deliver on $.45-$.50 in earnings, we see a double in the stock by the end of the year. Should this occur, social interest in the name will surge.
Additional disclosure: We are long Abtech (ABHD). We will also be buying into GV early this upcoming week.