Stock Market Video The Three Monsters Under Growth Investors'
In Case of Doubt Sound Convincing
Good stocks must have a good story
My stock selection metrics
The best mousetrap + market position + validated products
When I was a kid, my dad would tell me stories about his time
spent working as a stock chartist at the brokerage firm my
grandfather formed back in 1929. It's no secret that all kids
growing up have an innate fascination with their dad's life
experiences and for me, my favorite stories were about
Later, in an effort to stay awake during a boring summer job,
I asked the president of the company to allow me to read his Wall
Street Journal during my lunch hours. I started out studying the
newspaper every day, front-page to back, in an effort to escape
into a daydream off the job site. As fate would have it, this
cure for boredom developed into a thirst for actionable financial
Soon afterward, I made my first stock purchase, and my return
on investment as a first-time investor in the stock market turned
out to be a lot of money. I was firmly hooked.
Other these many years, I've learned a thing or two about
investment research that I'm pleased to share with you today.
The most important point involves a universal condition that
must be present before any stock goes up or down. Just as my
father's stock storytelling attracted me to invest, a publicly
traded company must have a potent story behind its business to
attract me to invest.
Stock prices frequently move in tandem-the power of the broad
market is strong-but certain individual stocks can diverge
dramatically from the overall stock market. Unlike most
corporations, a few specialized companies-because of the nature
and type of operations they're involved in-are capable of growing
sales and profits regardless of the overall economy.
As an investor in the stock market, your job is to find the
company that has an innovative catalyst (a product or service)
that fits into a powerful business/consumer trend and whose stock
price is not yet tethered to the stock market as a whole.
My investment strategy is to use a thematic approach, which
allows me to invest in stocks much earlier than institutional
investors, average investors and traders. I buy a stock based on
the attractiveness of theprospective growth in the business
The criteria I use for investment selection are similar to
those used by most investors: growth and value. The difference is
that my interest in a company is sparked muchearlier than my
counterparts in research services or investment funds.
I look for the better mousetrap, a viable product and end-user
the results appear in the company's financial
reports.Essentially, I want to find the "most wanted" stock
before the "most wanted" posters go up (and everybody knows the
I use the same research strategy that successful venture
capital funds use for finding stocks. Let me demonstrate with a
On July 6, I recommended
AuthenTec Inc (AUTH)
to subscribers of
Cabot Small-Cap Confidential
. At the time of my recommendation, the stock price was 4.30 a
share. Three weeks later, Apple agreed to acquire the company for
approximately $350 million or 8.00 a share.
At this point, you're thinking, "Wow, great timing!" Indeed, I
had no idea the payoff would come so quickly. But I wasn't
surprised, because when I decided to invest in AuthenTec, my
actions were fundamentally aligned with the reinvigorated energy
of the company's products and addressable markets.
My intense research indicated that eventually buyers would
line up to buy the AuthenTec stock. The stock had traded in the
3.00 range for months, and I focused on thematic metrics that I
use to identify sales growth approaching high gear: building a
better mousetrap (application/ease of use), trends affecting
product demand and product validation.
Here's my research in a nutshell.
AuthenTec's lead product is its fingerprint sensor. It's the
only available smart sensor marketed that can read the five
layers of skin below the surface of the skin, where the unique
ridge-and-valley patterns of the fingerprint originate. With just
the swipe of a finger across the fingerprint sensor, simultaneous
user authentication occurs based an individual's own unique
fingerprint pattern. In this manner, an electronic device, such
as a laptop or mobile phone can be securely accessed with the
ease of touch.
One of the most important trends in the use of smart sensors
is in the area of secure communication for mobile commerce, using
near field communication (NFC) radio to make mobile wallet
payment transactions. With an AuthenTec sensor integrated into
the smartphone, the transaction is facilitated with sensor and
one easy swipe touch.
As an alternative to PINs and passwords for transaction
security, smart sensors provide stronger fingerprint security and
encryption. A one-time password can be created when you swipe
your finger on the flat-surfaced sensor and credit card
information is released upon verification of a fingerprint
So AuthenTec's products offer a better mousetrap than
comparable products offered by their competition.
Next, I verify that marketplace trends will support demand for
Today, mobile phones are very much a part of our daily lives.
We now are more inclined than ever to use mobile phones to access
content and services anywhere. And now mobile phones are
extending into mobile commerce.
Everything that's in your wallet, such as credit cards and
identification, can now go on your mobile phone, so securing
these devices from theft or loss becomes vitally important.
Phones have been used as mobile wallets in Japan for seven or
eight years. Pent-up demand for NFC technology and secure mobile
payments is currently building in the U.S. and worldwide.
Clearly, the marketplace needs a sensor-like solution to protect
mobile payments and disseminate digital content for subscriber
viewing on their portable devices.
Then there's the law of large numbers.
The law of large numbers simply means that the products target
vast end-markets. As an investor, I want my companies to have the
greatest chance of succeeding selling their products and services
and making the most money at doing so.
According, to Cisco, the number of mobile devices by the end
of 2012 will exceed the number of people on earth. iSuppi
research projects that by 2015, 545 million NFC-enabled mobile
phones will ship compared to tens of millions in 2011.
Countries like China and India have unique ID cards with
biometric details including fingerprints. The impact on commerce
will be significant for AuthenTec as these IDs tie into mobile
terminals for government and merchant services.
With significant demand conditions in place for AuthenTec's
offerings and a confirmation of the market size, I next looked to
validate product leadership.
In most cases, I'm mandated by my investment technique to
invest only in market leaders with proven market share data, and
products that can be adopted by the largest companies, those that
define and shape entire markets.
According to AuthenTec, the company has shipped over 100
million sensors to nine of the 10 largest PC OEMs. In addition,
the company's sensors are being shipped in 20 million
smartphones. The three top handset manufacturers: Samsung,
Motorola Nokia and LG will go with AuthenTec for enterprise
So that's my research strategy in a nutshell: what you want in
your stock is a company with a better mousetrap, tsunami-like
trends for products the company makes or services the company
offers, the law of large numbers, validated market position and
validated products by the industry's movers and shakers.
The result is market-beating profits, which sometimes come
fast, and sometimes come slow. Either way, the rewards from the
independent research are gratifying.
Your guide to small-cap investing,
Cabot Small-Cap Confidential