Poised To Triple Portfolio Updates

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Includes: AERO, GLUU, JAKK, MATR, QADA
by: Mark Gomes
Summary

In 2009, I started sharing my Wall Street expertise with Main Street investors on Seeking Alpha. Since then, over half of my official picks have doubled, tripled, or been acquired.

This article will provide updates on each of my current long selections. I will also provide further elaboration on Fundamental / Technical Divergence, a concept I discussed here last week.

With a new round of fundamental news validating each of my selections, positive sentiment is returning. In other words, the Fundamental / Technical Divergences are reverting to equilibrium.

Since 1996, I have tripled my money every three years or so, on average. In 2009, I started sharing my Wall Street expertise with Main Street investors via my popular "Poised To Triple" series on Seeking Alpha. During my time on Seeking Alpha, over half of my official picks to triple have either doubled, tripled, or been acquired.

This article will provide updates on each of my current long selections. I will also provide further elaboration on Fundamental / Technical Divergence, a concept I discussed here last week.

Leading off, at the end of the Q3 earnings season, I informed investors that I was delighted with the earnings updates provided by every one of my selections. Indeed, they all surpassed Wall Street EPS expectations. Yet, despite the fundamental progress made by QAD Inc. (NASDAQ:QADA), Glu Mobile (NASDAQ:GLUU), JAKKS Pacific (NASDAQ:JAKK), Mattersight (NASDAQ:MATR), and AeroGrow (OTCQB:AERO), investors succumbed to negative sentiment and spent most of the past few months selling those stocks off.

This is what I call Fundamental / Technical Divergence: when a company's fundamentals are moving in the opposite direction of the stock price (which is often driven by technical analysis).

This is why I published the PTT Methodology. Emotion is an unavoidable aspect of human nature. However, it is also the #1 enemy of investors seeking to build wealth. The Methodology is a comprehensive and growing set of rules, meant to take emotion out of the investing process. It helps an investor to remain patient and calm in the face of irrational trading activity.

Those who took advantage of last week's article have already been richly rewarded. Though the market is down for the week, our highlighted company is up 4% in anticipation of a positive December-quarter earnings release. This has been partially fueled by MATR's positive pre-announcement on Monday AM, which spurred a 17% increase in share price.

With a new round of fundamental news validating my selections, positive sentiment is returning. In other words, the Fundamental / Technical Divergences are reverting to equilibrium. I can't predict what the next day, week, or month will bring. However, here's an update on each of my current Seeking Alpha selections:

MATR -- On Monday AM, the company surprised investors by putting out a press release pre-announcing positive metrics for its Q4 ended December. The key takeaways were as follows:

  1. Q4 total ACV bookings were $7.0 million, a 112% increase over Q3 and almost as much as the last two quarters combined. Total 2014 ACV bookings were $17.4 million, up 46% year over year
  2. Ending Q4 Annualized Book of Business was $42.8 million, up 46% year over year and 13% sequentially (which is 61% annualized).
  3. Perhaps most impressive, the number of routing seats sold to date increased 110% sequentially in Q4. That far exceeded the company's guidance for 75-100% growth.

This news, coupled with last week's executive hires, sets the stage for a strong 2015. Indeed, the pre-announcement stated that CEO Kelly Conway would be meeting with investors on Monday to discuss "the surge in momentum for its innovative personality pairing and behavioral analytics solutions, as well as the promising outlook for 2015 and beyond."

The company will report its full results on Wednesday, February 11. Personally, I don't care about the numbers or what they have to say. Monday's release confirmed what our independent research uncovered.

Considering the potential, the optimal plan is to close our eyes and open them a year or two from now. If they mess it up, the stock could be down $3 or so. If they do it right, I think it could garner a $480M market cap (well over $20 a share) based on 40% revenue growth and a commensurately appropriate 6x multiple for its highly recurring revenue model.

That's a $3 risk for a $13 reward. With metrics like that, it's best to take a long-term view, ignore the noise, and just let it play out.

GLUU - On Monday, a negative report was spurred by the insider selling by Greg Cannon, GLUU's Vice President of Finance and IR. Initially, the shares fell 3% in early trading. However, by 2:30, investors had come to their senses and the stock rallied in the face of a falling broader market.

For the record, my Methodology reminds investors that "insiders sell for many reasons, but they only buy for one." In this case, we have it on good authority that Mr. Cannon has had personal reasons for selling (which I will not disclose publicly). This is another case where it's better for investors to learn how to ignore such noise… because 90%+ of the time, that's all insider selling is.

It's better to stay focused on the fundamentals. Specifically, investors should remain mindful of GLUU's exceptional Q4 results (which belied fears regarding the waning popularity of Kim Kardashian's game), the signing of Katy Perry (who has more than twice the fan base of Kim K), and the company's promise to announce more signings in the quarters ahead.

This company's future remains quite bright. Like MATR, this story wreaks of great potential. The two-year risk / reward feels like $10 (and possibly more) up versus $3 down.

AERO - AeroGrow's December-quarter earnings report is coming on Feb 17. They produced $5M of revenue in the December quarter of 2013. Anything representing at least 50% growth ($7.5M or more) would keep the ball rolling. However, I'm expecting something closer to 100% growth, which would enable the company to report a profit and raise many eyebrows.

If all else fails, it appears that Scotts Miracle-Grow is eyeing the company for acquisition, as I reported last week.

This remains a speculative pick, because we need to see definitive proof that enough people will adopt AERO's products over time. Between the organic trend, the cost-savings trend, and the emerging marijuana opportunity, we may not understand AERO's true potential for another five years. As a result, position-sizing should be conservative to match the speculative nature of this pick.

In return, there is $100 of potential reward (not a typo, but read on) versus $4 of risk. However, the odds of reaching the $100 potential (or hitting the $4 of risk) are both prohibitively low. The most likely scenario is that Scotts acquires them for between $3 and $13, depending on how the next 12-18 months go for them.

JAKK - Disney blew out their numbers and said that Q1 merchandise sales are off to a hot start. Anyone who doesn't believe that Frozen is here to stay is pitting their opinion against that of Bob Iger. You could be right, but only because Bob is only wrong about 15% of the time. Guessing which time he's going to be wrong is like guessing when the dice is going to land on six. It'll happen from time to time, but you're better off betting on 1 through 5.

An earnings call date has yet to be announced, but last year's announcement took place on February 26th. I would expect them to report around that date once again. More importantly, I expect strong results and CEO commentary on how the Disney relationship is expanding to provide a positive outlook on 2015.

This one feels like $3 of risk for $14 of potential reward.

QADA -- Following a secondary public offering that knocked the shares down from a 52-week high of $22.99 to $17.05, a slew of Wall Street firms have initiated coverage with price targets as high as $30. This remains the largest, safest, longest-standing, and best-performing stock in our portfolio.

I remain bullish on QAD's prospects and valuation. We'll receive an update from the company on March 12th, when they report their January-quarter results. We have no specific reads on the recent tone of business, but the automotive industry (where its largest base of customers reside) has been doing very well, which serves as a positive data point for the company.

Either way, the stock continues to trade at a steep discount to traditional software M&A candidates, relative to its base of recurring (maintenance and subscription) revenues. This alone makes QADA a strong company to hold through thick and thin… and since we can't predict when the occasional slow quarter will hit, it's best to buy, hold, and take the long-term view… just as Warren Buffett has preached for years.

Disclosure: The author is long AERO, GLUU, JAKK, MATR, QADA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.