By Chloe Lutts
How is Skee-Ball Like Investing?
A 40, A 50 and A Hundo …
Three Stocks for Different Investors
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Aside from investing, I have a few hobbies and interests.
I like to cook. I enjoy yoga and snowboarding. I read, a lot.
And I play competitive skee-ball every Sunday night.
Competitive skee-ball hasn't quite attained the popularity of
league bowling, or chess … or even Scrabble. But it has a growing
following in New York and a few other cities. There are over 50
teams in my Brooklyn league, which is in its 15th season. The
first National Championship was held last year.
Skee-ball doesn't take much athletic ability, but it does involve
some strategy, and lots of practice.
And, I realized the other day, it's also a very good metaphor for
some aspects of investing.
As you can tell from the picture above, the point values on each
cup in skee-ball reflect the difficulty of getting the ball into
that hole. What fewer people realize is that the point values
also reflect the risk associated with making each shot. And
that's where skee ball is like investing.
Take the 100 cup, for instance. It's worth twice as many points
as the second-highest cup (worth 50 points) because it's smaller
and way up there in the corner-but also because if you shoot for
it and miss, your ball will most likely fall into the 10.
In that way, the "hundo" cup, as it's called, is a lot like
small-cap stocks. If you roll for a hundo and make it, it gives
your score a very significant boost. Pick a little-known
small-cap stock that turns out to be a big winner, and you'll see
the same effect on your portfolio. However, if you miss your
shot, you only get a 10. In much the same way, if your small-cap
stock doesn't turn out to be a big winner, it may waffle around
the same level forever-and could even go bankrupt. And the hundo
is a hard shot to make-most people miss most of the time.
The 40 and 50 are a little easier. I think of them as the growth
stocks. They're also less risky than the 100 cups. Miss a 40, and
you'll probably at least get a 20-you may even get a 30. And if
you overshoot, and you could get a 50! The 40's sweet spot right
in the middle is why it's the hole most players-including me-aim
Slightly better players will aim for the 50-however, the 50 isn't
within the 20 ring, so there's a good chance of getting a 10 if
you miss. I think of the 50 as representing more speculative
growth stocks-companies that at least have positive earnings, but
not much institutional support or history.
How you decide to play is a lot like building a portfolio. My
40-focused strategy is analogous to buying a portfolio full of
stocks with good support and medium risk-I think of them as
Ameriprise Financial (
), Baidu (
), Corning (
), Great Lakes Dredge and Dock (
), Netflix (
), NVIDIA (NVDA), Symantec (SYMC), The Mosaic Company
Union Pacific (UNP)
. They have strong charts, growing earnings, and increasing
support. They may not be household names, but investors are aware
of them and they have strong institutional support. They probably
aren't 10-baggers at this point, but it's unlikely you'll lose
all your money in them either.
50-style stocks are a little more speculative-they're not as
tested as the almost-blue-chips, but they have a little more
potential: stocks like
LDK Solar (LDK), TriQuint Semiconductor (TQNT),
Allot Communications (ALLT)
. These ones are a little more likely to surprise you-possibly to
the downside. But they also have more room to grow.
Then there's hundo stocks: There are obviously hundreds of
unknown little small-cap companies out there, but a few that have
been recommended in the Dick Davis Digests recently are
Elephant Talk Communications (ETAK), Verenium (VRNM),
Beacon Enterprise Solutions Group (BEAC)
. These stocks have little-to-no institutional support, and may
go nowhere. Some of them don't even have positive earnings. But
if you pick well, they can repay you well.
Putting together a balanced portfolio is a lot like rolling a
game of skee-ball-you have to assess your skill level, risk
tolerance and goals, and allocate your funds, or balls,
In a skee-ball game you only get nine balls-obviously, a
well-balanced portfolio can have more stocks than that. But it's
still wise for most growth investors to limit their portfolios to
a reasonable number of stocks, to allow the winners to really
shine (setting aside for now investing systems that rely on
holding dozens of stocks).
For investors who want peace of mind and medium risk, filling
your portfolio with 40-stocks is a fine strategy. Some will
underperform, but like an underthrown 40 shot, they'll probably
at least turn out to be 20s. Overall, a 40-focused strategy is a
good choice for investors who want to grow the value of their
portfolio without it keeping them awake at night.
Investors with a little more risk tolerance might want to add
some 50-stocks in an attempt to juice their returns. Aggressive
investors who are confident in their abilities may even rely
solely on 50-style stocks.
Then there's the hundo stocks. Like most investors, most
skee-ball rollers don't even try for the hundo. Like picking a
winning small cap, rolling a hundo takes lots of practice, and
specialized skill. And even the best hundo rollers miss
However, one of the rollers I play with has figured out a good
way to add some hundo potential to his game, without risking a
complete wash. Rather than going for the hundo on all nine balls
(which all too often results in a score of 90, derisively called
a "right angle"), he goes for the hundo on only the first three
of his nine balls. If he sinks one or two, he has a nice head
start, and if he misses all three, he can still get a decent
score by rolling 40s and 50s.
In the investing world, that's roughly equivalent to adding a few
high-risk small-caps to an otherwise growth-oriented portfolio.
If even one of them turns out to be a big winner, your portfolio
will reap the benefit. And if none of them go anywhere, you
haven't lost your shirt. For investors with a decent tolerance
for risk, and the time and inclination to do the research
involved in buying small caps, it can be a rewarding strategy.
What kind of investor are you? Do you roll all 40s, or do you
throw some 50s and 100s into the mix? Or are you a straight hundo
roller, risking a right angle once in a while but also hoping for
that big 900 (the highest possible score in skee-ball; not yet
accomplished in league play)?
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In keeping with the skee-ball theme, today's investment of the
week is actually going to be three investments: one 40, one 50
and one hundo. Take your pick!
For 40-rollers, I like
Kelly Services (KELYA)
, an employment agency. KELYA was recommended in the Dick Davis
Investment Digest back on December 1, at 17.86. At the time,
StreetAuthority's Dr. Melvin Pasternak wrote: "With unemployment
at 9.6% across the United States, it doesn't seem likely an
employment agency would be a hot stock. But staffing firm Kelly
Services appears to be a rising star. That's because as the labor
market slowly improves, companies need more employees to meet
growth demands-without having to hire permanent staff. So, many
companies are turning to Kelly's temporary staffing services to
hire contract employees."
Kelly spent most of the next two months trading in a tight range
right under 20, encountering a little turbulence in late January.
Then, last week, the company reported better-than-expected
fourth-quarter earnings, showing increasing revenue and EPS
growth, and the stock powered to a new 52-week high on
significantly higher volume. The shares are now consolidating
between 22 and 23, and could be bought here or on dips.
Slightly more risk-tolerant investors might want to take a look
Jazz Pharmaceuticals (JAZZ)
. Jazz hasn't been recommended in the Digests yet, but it has
been popping up in the newsletters we review fairly frequently.
The stock first began attracting attention back in early
November, 2010, and has displayed sustained upward momentum since
then, attracting even more investor attention-and dollars. JAZZ
is also made new 52-week highs recently, and now looks to be
consolidating for a renewed push higher. JAZZ has 58%
institutional ownership, compared to KELYA's 84%, so it has
plenty of room to grow. Plus, analysts are expecting a
pharmaceutical comeback in 2011. JAZZ looks to be a new leader in
Finally, for the adventurous investor, I might suggest
Capstone Turbine Corp. (CPST)
. Capstone makes energy-efficient microturbines that are used in
large buildings, landfills, wastewater plants, vehicles, data
centers and electric vehicle charging systems, to name a few. The
stock was recommended in the Investment Digest back in November
by Green Chip Stocks Editor Jeff Siegel. Then, it was trading at
79 cents. Today, CPST is up over 80%, trading near its new
52-week high of 1.54. But there's still plenty of potential
here-in a February 10 update, Siegel wrote the following:
"Earlier this week, Capstone Turbine reported results for Q3 of
fiscal 2011. Q3 revenue came in at $24.2 million, representing a
51% increase over Q3 of fiscal 2010. The company's backlog at the
end of Q3 was $84.7 million, up 8% from the same period last
year, and gross margin was $0.9 million compared to a gross loss
of $0.2 million in Q3 of fiscal 2010. Net loss came in at $8.1
million, compared to a net loss of $7.2 million in Q3 of fiscal
2010. But this was expected, and didn't trump Capstone's record
quarterly revenue and improved gross margin. After earnings were
released, the stock popped more than 10%.
"Here's what CEO Darren Jamison said regarding the company's
recent success in the oil and gas sector: 'Our recent success in
the U.S. shale market is evident of how we can quickly capture
market share after customers start adopting our new products. We
went from little or no revenue in the U.S. shale plays to selling
$10 million in less than six months. We have now seeded products
today in great companies like El Paso Gas, Pioneer Natural
Resources, Anadarko Petroleum, Chesapeake Energy, CONSOL Energy
and both the Marcellus and Eagle Ford shale plays.' … As you
know, we believe it is this angle that will allow Capstone to
maintain its impressive growth this year.
"Following earnings, Ardour Capital raised its price target to
$1.80, and Northland Securities raised its price target from
$1.75 to $2.00. While I do believe Capstone could justify a $2.00
price target, I'm not confident that the broader market will
allow it just yet. I think Ardour's price target is a bit more
realistic right now. However, if you're looking to pick some up,
I'd wait for the next dip. $1.80 isn't going to come next week,
and to see Capstone back below $1.30 is not out of the question
Capstone has 42% institutional ownership; which is more than many
sub-$5 stocks. But as Siegel wrote above, this is still a
high-risk investment. However, as one of two or three hundo-style
stocks in an otherwise medium-risk portfolio, CPST offers an
attractive way to boost your potential gain.
Wishing you success in your investing and beyond,
Editor of Investment of the Week
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