Think Equity's Questionable Stock Picks For the Next 10 Years

Includes: AQNT, PRVD
by: David Jackson

Think Equity's Michael Moe discusses the factors behind the top performing stocks of the last 10 years, and uses that analysis to predict winners for the next 10 years. Quick summary of Think's predictions - including two Internet stock picks - and a quick (and harsh) comment:

Moe identifies three factors behind the success of (what he claims is) the top performing stock of the last ten years (Apollo - ticker: APOL): (1) the company consistently under promised and over-delivered; (2) like other top performing stocks, it never looked cheap; and (3) it started out as a small cap, allowing ample room for future growth. Moe then infers two principles for picking future long-term stock winners. In his words:

  1. Focus on companies that have high earnings growth and not in the bargain basement. Companies with the best earnings potential are often not cheap.
  2. Focus on small cap companies. Size forges an anchor – as a company becomes bigger, it’s harder to achieve high earnings growth.
He then suggests a list of four future 10 year winners:

  • Opsware (ticker: OPSW).
  • (ticker: CRM).
  • Provide Commerce (ticker: PRVD).
  • Alnylum Pharmaceuticals (ticker: ALNY).
  • aQuantive (ticker: AQNT).
  • F5 Networks (ticker: FFIV).

Since two of them are Internet stocks, here are his comments about them in full:

Provide Commerce (NASDAQ: PRVD, $34.39 – Buy, Price Target: $46). Provide Commerce operates a "marketplace" of e-commerce websites that sell competitively priced, high-quality perishables, almost all of it (so far) flowers. Besides an easy to use site and reliable deliveries, the key competitive advantage is that the goods are consistently fresh and, by and large, fresher than alternatives. Provide ships almost all the goods it sells direct (or almost direct) from the supplier to the customer and bypasses most of the multiple stages that usually characterize the distribution of perishables from growth to importer/distributor to wholesaler to retailer.

aQuantive (NASDAQ: AQNT, $9.28 – Buy, Price Target: $12). aQuantive is a holding company consisting of an agency and technology business that specialize in digital marketing. The company was founded in 1997 and is headquartered in Seattle, WA.

Quick comments:
Hard to know what to make of this sort of analysis. The idea is terrific: identify the factors behind previously successful stocks, and use those factors to identify future winners. But the execution of the idea is questionable.

Was the identification of the past factors rigorous enough? Apollo has been a stellar stock (among other reasons) because the company was in an unappreciated growth market, it faced limited competition, its business model generated accelerating profitability from rising revenue, and it generated enough cash to build its own business without resorting to overly dilutive equity offerings. Yet there's no mention of those factors and whether they apply to Provide and aQuantive.

In fact, this sort of analysis is arguably simplistic and dangerous. Consider this: Mao's two principles can be read as "buy small cap growth stocks even if they look expensive". Is that wide-sweeping advice something you'd really want to follow?

Moe probably has a lot more to say about aQuantive and Provide Commerce. But if he wants his article to stand on its own, he has to provide more rigorous reasoning.

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