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With over 20 years of professional experience, Mark Gomes is among the world's most experienced technology stock analysts. During his time as a contributor to Seeking Alpha, over 50% of his official picks were either acquired or tripled in value. Currently, Mr. Gomes is the CEO of Pipeline Data,... More
My company:
PTT Research & Pipeline Data, LLC
My blog:
Poised To Triple
My book:
Faster Than Forty
  • The Three Stages Of A Winning Stock Pick 14 comments
    Aug 30, 2010 12:15 AM

    This article is intended to provide a framework for understanding how we categorize stocks at PoisedToTriple.com. This framework is critcal for understanding how many great stocks emerge...and how their stocks move (up and down). This framework is particularly applicable to smaller caps, but also valid for many large caps.

    Finding a great small cap story is only half the battle. The other (and more important) battle is figuring out how to profit from it. Understanding a company's progress in relation to its story is a key success factor. There are three distinct stages: The Great Find, The Wait Time, and The Gold Mine. A company's stock and its investors act very differently at each stage:

    Stage 1 - The Great Find

    A new technological upgrade cycle will soon unfold. A federal mandate will send billions of dollars into an area where funding and opportunities had previously been limited. A major economic change promises to breathe new life into a long-stagnant industry.

    These and countless other scenarios can presage a windfall of revenue and profits for an otherwise sleepy or unknown public company. Recognizing such a scenario and its publicly-traded beneficiaries before anyone else is a Great Find.

    Over time, more and more investors will discover the Great Find. This fuels a speculative run on the stock. In this stage, early investors often rack up enviable paper profits. Those who show up late could find themselves stuck with a long Wait Time.

    Stage 2 - The Wait Time

    The word is out. The Great Find is poised for accelerating growth and profits by the end of the year…or is it the end of next year? Thus begins the Wait Time.

    More often than not, the Wait Time lasts longer than anyone expects. For several quarters (or years) earnings reports fail to meaningfully exceed estimates. Worse yet, results often fall short of estimates. In some cases, the disappointing results are a direct result of the coming Gold Mine. Purchases of soon-to-be-antiquated products grind to a halt. Customers delay purchases as they await government funding. The effects of economic change are slow to make their way through the system.

    The Wait Time can last a lot longer than the initial build-up created by the Great Find. During this stage, investors will question whether this stock really was a Great Find. Many will become disillusioned or simply impatient. In either case, less people take an interest in buying the stock, while a growing contingent loses faith and begins to sell.

    Many times, these stocks will flat-line and even drift lower. Traders will opt to sell during this period. Devout followers will hold their stock and may even buy more on the weakness. Holders will be tested. If the stock drops for long enough, investors will fear that something has gone wrong. Of course, fear is never a reason to buy or sell. In fact, it is usually a perfect time to do the opposite. This is why capitulation is usually a reversal point.

    Most of the time, none of the fears come to fruition. The company reports its last mediocre quarter and provides guidance that they are beginning to reap the rewards of a Gold Mine. However, many investors are no longer around to hear the declaration. Others hear it, but are deafened by skepticism. They focus on the recent past instead of looking forward to the brightening future. They aren't around to experience the Gold Mine.

    Stage 3 - The Gold Mine

    The Wait Time is over. The company announces a quarter that exceeds Wall Street expectations and raises expectations for the quarter to come. 3-months later, they do it again…and then again.

    The stock begins a renewed ascent. Often, the run will be interrupted when the stock hits levels last seen during the Great Find. Early and battle-weary investors recall how "stupid they were" not to sell at those heights…so they sell now.

    Once demand regains command over supply, the stock heads to new heights, leaving countless once-believers in the proverbial dust. After a long, hard journey, it's the newest investors that reap the greatest reward. In some cases, the stock runs longer and goes higher than anyone ever dreamed.

    How to Make a Big Profit

    This framework extends beyond small caps. It actually applies to companies at every level of capitalization and even entire markets. The Internet Bubble was a perfect example of how the initial euphoria surrounding a "Great Find" can implode into a painful "Wait Time". However, as we saw with companies like Amazon.com, when the "Gold Mine" hits, it hits big.

    (click to enlarge)

    If every stock with a great story dutifully and predictably worked its way through the three stages, this section wouldn't be necessary. In reality, some great stories have unfortunate endings. Others end well, but not well enough to reward all investors (especially those who bought at over-hyped levels). In these cases, those who bought during a Wait Time collapse turn a great profit.

    In any case, the key to maximizing profits is to correctly identify the stage in which the company (and its stock) resides.

    There are hundreds of great small-cap ideas to be found on Seeking Alpha. A series of forthcoming articles will discuss some of the most promising stories and track their progress through the three stages. Each case will have its own unique characteristics, providing broad insight into the myriad paths a small cap stock can take on the way to fulfilling its potential.

    Themes: Small Caps
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Comments (14)
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  • bazooooka
    , contributor
    Comments (2893) | Send Message
     
    Mark,

     

    What's the most recent stock you've held that went through these steps?
    23 Aug 2012, 09:14 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1972) | Send Message
     
    Author’s reply » It's happening to DWCH now. I was planning to write it up after visiting the company in May, but I left for Europe right after that...and the day I returned, they announced blowout numbers.

     

    As for the 3 stages, the stock ripped in early 2011 when they announced a new CEO (Michael Morrison) with a great track record (great find). It nearly doubled from 3 to 5 in a few weeks on the news.

     

    After that, it went NOWHERE for 12-months, as Morrison settled in and formulated his plan (wait time).

     

    Most recently, the last few quarters have demonstrated an incredible resurgence, driving the stock from under 6 to 19 this year.
    24 Aug 2012, 01:01 PM Reply Like
  • bazooooka
    , contributor
    Comments (2893) | Send Message
     
    Any updates on this one? 2013 so far has provided big Ups and Downs.
    23 Jul 2013, 07:21 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1972) | Send Message
     
    Author’s reply » Hi Bazoooka,

     

    If you visit the Methodology section of PoisedToTriple, you will see how my picks work. My goal is to be early into an investment. As you can see with many of my past picks, they can sometime take time to materialize, but the results are usually excellent.

     

    It's a trade-off some investors are willing to take. Others are not. I respect everyone's right to choose whether my approach is right for them. Specific to DWCH, stay tuned. Updates will come as event warrant it.

     

    Good hearing from you. Cheers.

     

    Mark G.
    23 Jul 2013, 09:24 AM Reply Like
  • bazooooka
    , contributor
    Comments (2893) | Send Message
     
    Mark,

     

    What are you current thoughts on DWCH; you seems to have been able to time the swings in the past. Going back a few years people would have done well every time it pulled back toward $12 or so.
    22 Jul, 07:58 PM Reply Like
  • Jpokergman
    , contributor
    Comments (78) | Send Message
     
    Hi Mark,

     

    I recently started following your work with keen interest. Having scoured your methodology at PTT, I was not at all surprised to see 2 other stocks that I also have in my portfolio. Which consists of only 9 Equities in total. Well...I was actually quite impressed to tell you the truth.

     

    We both have taken a position in GLUU, for pretty much the same fundamental reasons and our targets are within reason. However, my intentions of "staying", are probably far more aggressive than yours may be.

     

    I have a Macro question for you and your Team. Which may perhaps take some time to answer.

     

    I am now a single Investor, therefor my resources are "stretched", and cannot possibly begin to find the material I need to go back this far.

     

    Sometime during the early eighties, volume was low, I for get the average volume of the Dow, when all of a sudden due to Reagan's Tax policy change, the Dow had traded 20x average volume and climbed some crazy amount of points. Most people thought it was an aberration, but Volume never slowed, and that was the beginning of the true great Bull market.

     

    My question is this: It truly seems as though the dynamics for corporate Tax reform will take place. If the Corporate Tax were to go to between 15%-18%, And this Tax reform were to happen WHILE, the fed were still at an accommodative to neutral policy, what multiple would you put on the 1. entire S&P with regards trailing earnings, and Forward earnings.....And 2. What you specifically Re-value GLUU's fwd earnings at? Also what would you re-price GLUU's stock price?

     

    I understand this is a lot to ask, but I believe it is ALSO in your best interest to answer these questions, because it is my strongest opinion that The Government Hates seeing tax money leave this Country. And Legislating some stupid rule, is totally futile, because it will never hold up in Court.

     

    Therefore Tax reform is the ONLY option. And these idiots must do it quickly. They have a gun to their head.
    22 Jul, 02:52 PM Reply Like
  • Mark Gomes
    , contributor
    Comments (1972) | Send Message
     
    Author’s reply » That's a great question, but to be honest, I don't worry about the implications of legislation until it is passed. I may miss the first or second inning of the trade, but the middle innings matter most.

     

    I learned the hard way that getting in too early may leave you stuck in a rain delay.

     

    By the time anything happens, IF it happens, there will be a whole new set of moving parts and data points. Keeping it simple has proven far more lucrative (for my wallet and peace of mind) ;)

     

    Kindest Regards & Great Making Your Acquaintance!

     

    Mark G.
    22 Jul, 03:46 PM Reply Like
  • abeateninvester
    , contributor
    Comments (33) | Send Message
     
    hi, Mark,
    Only if I read this article earlier. I bought Gluu@5 and rode it down and up and sold at a little bit over 5 when it corrected sharply one day. I truly believed Gluu's story and allocated 2/3 of my monney. I tracked its grossing of games for a couple of quarters and compared their grossing history, when gluu crossed $5, as you decribed"Early and battle-weary investors recall how "stupid they were" not to sell at those heights…so they sell now." Now I am watching gluu at 7 painfully.
    24 Jul, 02:52 AM Reply Like
  • bazooooka
    , contributor
    Comments (2893) | Send Message
     
    abeat,

     

    Be careful with the 2/3 of money in any one idea. Mark offers enough picks where you can spread that around 5+ ideas. Although some say 10-20 ideas is more prudent. There will be many more GLUU type ideas; heck you only missed $2 of the GLUU run. Anyhow there is likely better risk/reward in some of the other PTT names at this point, imho.
    25 Jul, 02:29 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1972) | Send Message
     
    Author’s reply » You have a long life ahead of you, my friend. I've picked many winners before and will pick many more, so long as I am alive and well.

     

    Today's a good day to start. Before long, your GLUU lament will be a distant memory. Trust me. I don't remember very many of my past mistakes... they get overwhelmingly overshadowed by the successes :)

     

    Be sure to read this one!: http://seekingalpha.co...
    24 Jul, 03:03 PM Reply Like
  • Quantease
    , contributor
    Comments (73) | Send Message
     
    Mark this seems a timely story for PXLW. I just sold at a near double because it regained the peak after the Apple news early in the year. I like the story about 4k TVs and co-developments leading to significant market share gains but given lack of profitability I was too tempted to hang on and oreferred the risk/reward of recycling into GLUU. Whats your current view on PXLW.
    25 Jul, 08:24 AM Reply Like
  • Quantease
    , contributor
    Comments (73) | Send Message
     
    I suspect I need to be a subsriber for this but just in case here's some tips: GILD, SLCA/HCLP/EMES loom at last SLCA transcript.
    25 Jul, 08:28 AM Reply Like
  • Mark Gomes
    , contributor
    Comments (1972) | Send Message
     
    Author’s reply » Hi Quant,

     

    Astute observation -- questions like that get answered for subscribers in our Members' Forum ;) http://bit.ly/UsrzTN

     

    Cheers,

     

    Mark G.
    25 Jul, 03:19 PM Reply Like
  • User 20896211
    , contributor
    Comment (1) | Send Message
     
    $himx chart looks like this it's about to hit this exact chart play. Thanks
    30 Jul, 07:58 AM Reply Like
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