Stop me if you've heard this one. The
onestock you
mustbuy is ... the next
Costco (Nasdaq: COST),
TD Ameritrade (Nasdaq: AMTD),
Yahoo! (Nasdaq: YHOO), and
Intuit (Nasdaq: INTU), all rolled into
one.
That's a pitch I'm sure you've heard some semblance of at
cocktail parties, golf outings, weddings, and of course, on
the Internet.
It's a fairly appealing enticement. After all, Costco, TD
Ameritrade, Yahoo!, and Intuit are some of the stock market's
great success stories. These companies earned early investors
mind-boggling returns.
The secrets of success
Does that
onestock you
mustbuy exist? Of course it does. But can you find
it? That's a different matter.
However, here's a litmus test to gauge every stock tip you
come across. Simply ask: Does this company bear any
resemblance at all to Costco, Ameritrade, Yahoo!, and Intuit
beforethey were big names?
I'm not saying that your
onestock will be a big-box store or a tech
superstar. But Costco, Ameritrade, Yahoo!, and Intuit all
share a set of remarkable traits that characterized them when
their amazing runs began. All were:
1.   Small.
2.   Led by a
dedicated founder(s).
3.   Fiscally
conservative.
4.   Profiting from a
wide market opportunity.
If the next stock that's pitched to you doesn't possess
these traits, it may not be the "sure thing" it's advertised
as.
A case study
Consider, for example, the cases of
HLTH (Nasdaq: HLTH) and
lululemon athletica (Nasdaq: LULU) -- an
Internet health-care company and a yoga apparel maker,
respectively, that have recently been pitched to me at
cocktail parties, golf outings, weddings, and of course, on
the Internet.
Are they small? Fairly. Both are capitalized around $1.5
billion.
Are they led by dedicated founders? No and yes. While HLTH
has a fair dose of insider ownership (more than 8%), there's
been some movement in and out of the CEO's office. Lululemon
founder Dennis Wilson, on the other hand, serves as the
company's chairman and chief product designer and owns 7% of
the company.
Are they fiscally conservative? While both companies are
profitable and cash-flow positive, lululemon needs to keep an
eye on its SG&A expenses, and HLTH has had some lumpy
operating performance.
Do they have wide market opportunities? That answer gets a
little cloudy. While both companies' products have received
good reviews, both also face significant competition going
forward. Furthermore, in order to keep growing, both will
encounter more and more competition. Lululemon, for example,
will have to go head to head with behemoths like
Nike (NYSE: NKE).
The Foolish final word
I'm not here to be negative about either HLTH or
lululemon. Both have positive traits that could make them
good investments. Continued... |