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Ubiquiti Networks (UBNT) raises guidance and stock soars 20%, but questions remain

8/7/2017

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UBNT popped up on my one of my screens last week so I decided to take a look at it. The company develops networking technology for service providers and enterprise customers. Their business model is a bit unique, as they sell directly online to distributors, which means lower SG&A expenses and little capital needed to operate the business. This translates into high operating margins and high ROIC. ​ It was founded by Robert J. Pera who still holds over 70% of stock. The interesting thing is, that he receives no salary or compensation as a CEO, so his only earnings come from selling stock as UBNT pays no dividends.

It sounds like a good story, but there are issues with operating cash flow and inventories. Revenue was up 23% in the last quarter and 30% over the past 6 months. The company expects $1-1.15 bil. in revenue for the year ending June 2018 or 27% growth over 2017. This looks promising but receivables are growing much faster, which suggests aggressive revenue recognition.
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Below is the latest balance sheet. Receivables are up 67% and vendor deposits increased almost 80%. I was not able to find a description of what vendor deposits actually are. Managements sometimes create obscure items in the balance to hide a deteriorating condition of the business. Days sales outstanding (DSO) have increased to 58 days in 2017 from 40 days in 2015, another huge red flag. Inventories increased 150%, way out of line with current revenue growth and expected expansion in 2018. Days inventories on hand (DIH) are up to 142 from 41 in 2015, a huge increase.
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All these balance sheet items have a negative impact on operating cash flow, which has now slipped below net income, a significant red flag. There is a growing divergence between these two metrics, which suggests earnings manipulation. If you buy inventory and later don't sell it, or you recognize sales but don't collect receivables, you are overstating income. 
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Source: ​https://stockrow.com/share/6487acd1916bee45148b6970c56f616d
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I like their growth and ROIC numbers, also the fact that CEO owns such a sizable stake in the business. But the rapid increases in receivables and inventories might be a problem few quarters from now. I am not going to short the company, but I will certainly not buy their stock at this moment.
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Arista Networks reports excellent results

8/4/2017

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ANET reported excellent results yesterday after market close. Revenue was up 51% while operating income more than doubled to $116 million, all customer segments recorded doube-digit growth. New products launched last year now represent around 30% of sales, incredible achievement. And according to the CEO, the upgrade cycle for 100-gig switches is just beginning:

" First of all, I think we are in very early stages of 100-gig upgrade cycles in general. 40-gig was a window of opportunity, mostly in the enterprises, but almost every major cloud is going to 100-gig spine. Right? And I think that cycle started for us with especially the R Series. There's a little bit of it in the E, but it really started in 2016 and I believe it's a five-year cycle."

The company's market share is around 14-15% at this point, they still could possibly double it or more. In addition they are getting more visible in other markets like routing and data analysis which will start contributing in the next few quarters.


I have been long ANET since September 2016 and do not plan to sell anytime soon. Their P/E ratio has climbed above 56, which is really nosebleed territory, but then revenues and income are growing this fast, it might be justified. Jayshree Ullal, Andy Bechtolsheim and Kenneth Duda are executing flawlessly and they have exceeded all my expectations. Cisco is trying hard to stop Arista, but the company is just firing on all cylinders. There is really no reason to sell these shares at this point, I think their revenues and cash flows will be much higher 3-5 years from now so I keep holding.
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Website with historical financials and fundamental charts

7/13/2016

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A new website called https://stockrow.com/ just launched. It features free historical data, interactive charts for stocks, peer group comparisons and much more. The site is very user-friendly and you can access over 7000 active and delisted US stocks. There are 200 fundamental indicators, which you can use to compare various stocks across industries. For example here is a chart showing SG&A expenses of major biotech companies:
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4 things to do when markets (and your stocks) go down

2/6/2016

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Bear markets are always tough. Watching your stocks decline is a really terrible feeling, and you need a way to keep cool and stay focused on long-term results. Here are some things that help me get through it:

1. Do something else

Go out for a beer, take your girl to a cinema or whatever it takes to get it off your mind. If you keep thinking about losses you will only compound mistakes. Know what you own, and if there is value in your stocks, you will sleep comfortably. Thinking over and over that you should have sold some or kept more cash won't help you. Analyze any mistakes you made, learn from them and move on.

2. Read a good investing book

Classics like Intelligent Investor or Market Wizards from Jack Schwager always help me get through rough times. You have to remember that stock prices deviate frequently from underlying intrinsic values, and unless that value is impaired you are getting bargains. Advice from Ben Graham, Warren Buffet, Ray Dalio or Richard Driehaus really force me take a step back and realize that market swings are irrelevant and unpredictable. What matters are sound investing principles applied with prudent risk management rules. Take these times as an opportunity to relax and read more about stocks to improve your future performance.

3. Think long term

No investment strategy makes money all the time. We go through ups and downs, and you can do well only if you think long-term and stick to your plan during market turmoil. This is what separates winners from losers. Winners know, that their strategy will go through periods of underperformance, but as long as it is fundamentally sound, they will come ahead over a long term horizon.

4. Go exercise

Fresh air can really clear your head, whether it's taking a walk, going to a gym or playing hockey, you will feel much better after. There is an old saying: "Healthy mind in a healthy body". Your thinking will be better because you already vented your frustration about market losses. Everybody feels much better and healthier after a little exercise!

Everyone goes through periods of sustained losses, you need discipline and a clear strategy to make it through. Hopefully this helped a bit, if you have any other advice, please share it below!

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Luxoft and EPAM systems: Battle of IT outsourcers

9/22/2015

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- Both companies are well positioned in the industry, and poised to gain from IT spending in financial and tech sectors.

- EPAM's business is more diversified, with lower margins. LXFT is highly concentrated, but more profitable.

- Valuation seems to speak more in favor of EPAM.

Luxoft (NYSE:LXFT) and EPAM Systems (NYSE:EPAM) are providers of software development services and IT solutions to a global client base consisting primarily of large multinational corporations mainly in Western Europe and North America. 

Full article at Seeking Alpha: http://seekingalpha.com/article/3514316-luxoft-and-epam-systems-battle-of-it-outsourcers


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LGI Homes: Stable Growth For A Very Low Price

8/12/2015

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Summary
  • LGIH has a unique business model with high gross margins.
  • Attractive valuation and profitability indicators.
  • The company posted revenue gains even during the housing crash in 2006-2008.
LGI Homes (NASDAQ:LGIH) designs, constructs and sells new homes in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina and Colorado. It was founded in 2003 by Tom Lipar, who still holds a 6.3% stake in the business.


Rest of the article is available exclusively on Seeking Alpha:
http://seekingalpha.com/article/3430426-lgi-homes-stable-growth-for-a-very-low-price
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S&P500 and major corrections : Is another one coming?

8/6/2015

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Martin Zweig published his famous book „Winning on Wall Street“ in 1986. He outlined several macroeconomic and sentiment indicators, which helped him avoid or mitigate losses during bear markets. He was famous for 2 things: Having correctly predicted the crash in 1987,buying put options before it. And also being the 1. newsletter in Hulbert Financial Digest based on risk adjusted returns, because during the measurement period in 1985-1997, he never had a losing year.

While Zweig used many different indicators, he considered two of them most important : interest rates and debt growth. There isn’t a single indicator that’s correct 100% of time, usually they give confusing signals, so we have to be prepared what to pay attention to.

Goal of this article is to help the reader avoid the worst bear markets by either raising cash or selling short. I do not recommend shorting before a market (or individual stock) has topped. Always wait for a correction of at least 10%. I believe it’s impossible to forecast a top, and there is no need to do it. If you correctly assess a coming bear market, there is plenty of money to be made or losses to avoid many months after the actual top.

I have looked at the past 60 years and highlighted all corrections on S&P500 worse than 20%:

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Source: finance.yahoo.com
As you can see, there were 13 corrections of that magnitude, ranging from -20% to -58% (subprime crisis). In terms of duration, they lasted from 1 month to 31 (dot-com bubble). We can even separate them into brief crashes (1966, 1980, 1987, 1998, 2011) and major bear markets (1961-62, 1968-70, 1973-74, 1980-82, 2000-2002, 2007-2009).

Interest rates and S&P500

Fed funds rate
Over the past 60 years, rates have gone from 1% to almost 20%, and then back to 0% (click on image to enlarge it). I have highlighted the start of each correction with red (market top), and the end with orange (bottom). As you can see, all market corrections started during or right after major rate hikes, by that I mean at least 1%. We can conclude that first hike might not be enough to bring a market down. However, it is quite evident, that rising rates are stock market’s enemy no.1. It doesn’t mean that when rates are rising you should sell everything, it means that odds of a correction are higher with each hike and it will happen in the end.

Consumer debt and personal expenditures

Data for consumer credit is available from 1968, this chart shows the YoY growth rate (click to enlarge).
Consumer credit YoY growth
Source: https://research.stlouisfed.org/fred2
Again, I have highlighted corrections here. It seems that most corrections occurred before or during major deceleration in consumer debt growth rate. If we look at worst market drops in 1968-70, 1973-74, 2000, and 2008, we can see a similar pattern in each. Debt growth kept accelerating towards the beginning, and then quickly fell off in middle of crisis. 

After it reaches extremely low or negative numbers, it’s usually a good opportunity to buy stocks as the deleveraging effect has already happened in most part. 

Rule: If markets are down at least 10% from peak and consumer debt growth starts declining, be careful.


Next chart shows the YoY growth of personal expenditures vs. corrections:
Personal expenditures YoY growth
Source: https://research.stlouisfed.org/fred2/series/PCE#
One man’s expense is another man’s income and vice-versa. If personal expenditures are falling, incomes are down as well. We can see that before or during major crashes expenditures declined significantly. If you had sold stocks or bought options in middle of bear markets in 1969, 1974, 2000 and 2008 after growth decelerated, you would have still avoided a 30% loss in each case. 

Rule: It can be said that when expenditure growth decelerates by at least 30% (let’s say from 10% to 7%), there is a high risk the correction will continue further.

Mortgage debt growth

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Source: http://www.federalreserve.gov/econresdata/releases/mortoutstand/current.htm
If we look at mortgage debt growth, the only similarity can be seen in 1956, 1965, 1980s and 2008, where it declined before and during the market drop. A significant slowdown in early 1990s did not produce a crash, so again this indicator doesn’t work 100% of the time, but could be used in tandem with others to determine an impending crash. Rule: Slower mortgage growth is sometimes negative for stocks, but this indicator does not seem to work as well.

Corporate profits

Profits are ultimate drivers of individual stock prices. If they are going down, the company is probably not doing well. But it can also be applied to the general market:
Corporate profits growth and S&P500
Source: https://research.stlouisfed.org/fred2/series/CPATAX#
This chart shows year over year change in corporate profits. As you can see, almost every time when profit growth was negative, a major correction in S&P500 followed. This was true in the housing and dot-com bubbles, 1974 bear market and October 1987. Other periods show a significant decline in growth before market tops occurred. Again, if you waited until markets topped and sold off at least 10% you would save a lot of money. Rule: When profit growth is negative or decelerating, correction is around the corner.

Sentiment indicators

Martin Zweig used many different indicators like Put/Call ratio (which he invented), AD Line, High/low ratios, Barron’s ads and so on. But according to his book, AD Line was the most important.

Advance-Decline line is constructed at the end of each day. You simply take the number of advancing stocks, subtract the number of declining stocks and get a final figure. Over time this will develop into a line, which declines when more stocks are declining than advancing, and advances when the opposite happens. I have constructed my own line based on NYSE data.

NYSE Advance decline line
Source: http://unicorn.us.com/advdec/
AD Line kept declining from 1965 to 1982, a period of high interest rates and severe bear markets. From there it advanced steadily (along with general markets), until 1998 where it topped 2 years before dot-com bubble burst. This was repeated in 2007, when AD Line registered an all-time high in June, 4 months before the crash. It doesn’t work 100% of the time but in combination with other indicators discussed above it can be quite useful.

How to protect yourself against severe bear markets

1. Buying put options – Options give you limited risk and a big return potential in case you are right. Their downside is of course expiration and price, which might be higher in times of market turmoil due to increased volatility. You have to be quite right on the timing, or buy options with at least 6-12 months to expiration.

2. Shorting individual stocks – Best and hardest way to make money in bear markets. Do not hedge just for the sake of hedging. What will happen is that both your longs and shorts will go against you. Or as John Armitage once said: “If you need to hedge an individual position, perhaps you shouldn’t be in it.” 

Short only into a downtrend and each stock you short has to be that of a overvalued company, in a competitive industry with accounting red flags and whose earnings or assets have a high chance of declining over next year or two. Shorting individual stocks is extremely hard and requires days of thorough research, after which you might wait years to realize any profit.

3.  Selling long positions and going into cash – When markets have reached an elevated stage, P/E ratios are stretched and interest rates start going up, perhaps it’s a good idea to reduce some positions gradually and raise cash. You will sleep more comfortably and think with a clear head, which might help in determining the next step. However, do not get rid of all stocks in panic, as a bear market might not come and you will miss a lot of gains.

When interest rates are rising, indicators start flashing warning signs and markets make at least a 10% correction, the best way to protect a portfolio is to combine all three points. After a good year, buying puts for 1-2% of portfolio will not hurt much when you are wrong. Finding a good short candidate is tough but very rewarding. And lastly reducing positions in stocks which after thorough analysis seem to be overvalued, is a good way to take profits and raise cash to prepare for a bear market. 

Where are we now?

Interest rates are near zero, so to find a comparable period we have to go back more than 80 years to the Great depression. Federal funds rate data is not available from that period, but we can substitute it by a 3-month treasury bill yield.

Interest rates were very similar to current levels, and FED raised them 8 years after the crash. What followed was a quick recession, industrial production fell 20% and stock market lost half of it’s value in a few months. Realizing the mistake, they quickly reversed course and lowered rates, where they remained until 1941. 3-month treasury yield reached 0,02% during that time, which is the same value like now. Some prominent investors like Ray Dalio have raised concerns about FED’s plans to raise again, saying we might see 1937 again. After the 1937-41 bear, a huge bull market started that lasted more than 20 years.
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Going back to present, profit growth had some negative quarters already and is at historical minimums, personal expenditures and consumer debt growth is declining and the AD line is 3,5% below it’s peak. Some indicators are flashing warning signs, but interest rates are still not moving up, and S&P500 is hovering near all-time highs.

For now, I will enjoy the ride but when rates start going up and markets down, I will quickly adjust to a new situation. Remember the goal is to avoid major losses during bear markets, not predict them precisely. Everyone wants to outperform the market, losing as little as possible during such periods is one way to do it.
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Vakrangee Ltd. (511431) - Investing in India's booming banking industry

7/10/2015

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Vakrangee sts up and manages a robust framework of ultra small branches across India according to a government plan of "financial inclusion". Branded as Vakrangee Marts, these outlets provide banking and BFSI services to the under-served population of India with an objective of inclusive growth. Through their partnership with 31 public sector banks and an outsourced model, Vakrangee provides end-to-end banking services in India. In addition, these Brick & Mortar branches offer a host of G2C and B2C services, becoming a one-stop shop for India’s under-served population. 

As of March 31st, the company had 11820 branches in rural areas, and 1288 in urban areas. They have grown their urban segment from scratch (15 branches) to hundreds in only one year.  Under Common BC and National BC agreements with various public sector & private banks, they are allowed to open up to 35 000 rural and 15 000 urban branches, offering also insurance or G2C (government to consumer) services. Their urban segment will be probably most lucrative, as people in cities have higher disposable income and will generate much higher demand for banking and financial services.

There still seems to be a big opportunity for this business model in India, according to their annual report:

- India is still largely under-banked, with only 35.2% of population having bank accounts. 
- There are only 11.4 bank branches per 100k population in India, of which only 30% are located in rural areas. 
- Around 70% of population lives in rural areas, of which 46% does not have banking access.
- Further, even in urban areas ~32% population does not have banking access. 
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ATM penetration in India. Source: Vakrangee annual report
Let's look at financials:

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Let's look at financials:

Vakrangee has grown revenues more than threefold, while net income grew by 600%. Also, looking at 12-month trailing sales we can see that growth is actually accelerating vs. last year (41% vs. 26%). What's even better is that the company has 3-times more current assets than total liabilities, so they should be able to cover expansion costs without raising additional capital.

There are 2 red flags: receivables seem to be growing faster than sales, which is strange given their contractors are well capitalized banks and the Indian government. Second one is that Vakrangee does not generate free cash flow. This might be a problem for heavily indepted companies with limited growth, but shouldn't pose a big problem for Vakrangee, the company is just putting all money back into the business to create more value for shareholders.

Valuation


Indian stocks trade at significant discounts compared to their western peers. It might be because country risk is a bit higher, same like the risk free rate. As such, investors demand higher returns, thus higher discount rates. I used growth of 30% for next 3 years (half the average of past 4), 10% growth for next 5 years:

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I have used capital asset pricing model to determine the discount rate, growth rates are quite conservative. At 148 Rs. per share, investors expect very strong growth from Vakrangee, although at PE 23 and P/S 2,6 it doesn't look that expensive. Shares might go higher, but the risk reward ratio is not so favorable. 
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The New Home Company - Small-cap homebuilder with attractive valuation

6/30/2015

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NWHM was founded in August 2009 by Larry Webb, Wayne Stelmar, Joseph Davis and Tom Redwitz who still hold a combined 20% of the company. Each of them has at least 25 years of real estate experience, and some of them have worked together in John Laing Homes, which they took private in a management buyout and later sold in 2006. New Home Company operates in California, mainly in SF bay and around Sacramento. As of December 2014, they owned 22 communities and 54 communities with their join ventures.

According to management, after real estate prices collapsed in 2008, they formed the company and bought several blocks of land for attractive prices. NWHM develops and owns some properties (37% of revenues), and also builds real estate for 3rd parties (63%). However, first segment is more lucrative with 15% gross margins, compared to 4-5% fees they collect in second one.

Basically, it is a home builder located in California, building and acquiring mainly communities, either on it's own or through joint ventures. Let's look at financials. 
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It is apparent that NWHM is growing it's top line quite fast, and this will accelerate in 2015 as they aim for $400 million in revenues. The company is expected to report a full year EPS of 1.35-1.45, giving it a forward P/E of around 12, and forward P/S of 0,7. For 2016, the situation looks again quite similar, where NWHM guided growth of revenue and EPS at 60% and 70% respectively. As of 31st of March, the stock had 50 million in cash, and 125 million in long-term liabilities. Company backlog grew around 5 times to $82 million in last quarter YoY, while backlog of joint ventures doubled in the same period. They seem to be executing their strategy well, and should be able to reach this year's targets easily.

US Housing market

Housing market is the cornerstone of every major economy. It's recovery has led US out of most major recessions, but this time it's really sluggish. New home sales are at levels seen during recessions in 1970s and 1980s, and house prices in certain cities still hover around 2012 lows, even though the average is steadily climbing up. Most home builders have lagged S&P500 performance in last 2 years (exception is Lennar, LEN), even though the housing market has quite improved. As a result, the whole group trades for low valuation multiples, with impressive growth rates. Situations like this offer great risk / reward ratios, and as such are very attractive investments. NWHM is the fastest growing public-listed home builder, with a great management (they made fun of each other on last conference call, too bad JP Morgan analyst didn't get the jokes), and a lot of potential. Bought the stock already with stop loss as usual. Good luck in investing!

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US New Home Sales
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House prices in US
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Luxoft (LXFT) - Undervalued midcap in IT outsourcing sector

6/16/2015

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Luxoft offers specialized software development to multinational companies in 6 main sectors: Financials, Automotive, Technology, Telecom, Travel and Energy. Around 65% of revenues come from the financials, mainly from contracts with Deutsche Bank and UBS. Most of workforce comes from Ukraine, Poland, Russia, Bulgaria (advanced projects) and Vietnam (less advanced). Customers are mostly from US, UK and Germany, with companies like Ford, Boeing, and IBM using their services. 

According to Luxoft, wage costs for qualified programmers are 75% lower in CEE (Central and Eastern Europe), than in the West. Wage inflation is around 6% in Russia and Ukraine, but they still have a huge cost advantage for many years to come. LXFT basically offers higher quality work than developers from India or Bangladesh, for a fraction of the cost in US or EU. Let's look at financials:
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Luxoft has grown steadily over the past few years, gross and operating margins are recovering after a dip from 2011. Net margin was down in 2015 due to a $8 million loss on currencies (which is strange, considering their revenues are in EU and USD, while costs in currencies like Polish Zloty and Russian Ruble) and a higher tax rate. They have a special tax treatment in Russia (until 2017) and recently moved to Switzerland so tax rate shouldn't increase in the near future.

Valuation
I used a three stage DCF model with these assumptions:

- profit growth of 20% for next 5 years, 10% for years 6-10, 2% thereafter
- discount rates of 6,7,8%
- 13% net profit margin
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You can see that LXFT offers at least 30% potential from current prices, given assumptions above. I think it is trading so cheap because of the situation in Ukraine and Western sanctions against Russia. Another thing is that the company derives most of it's revenues from financial sector, which is currently not "popular", but much better capitalized and with a brighter future than in 2007. Be greedy when others are fearful, and be fearful when others are greedy. I am going long LXFT stock today with a stop loss like usual.
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A successful strategy for buying momentum stocks

6/6/2015

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Financial pundits, news commentators, and various bloggers describe momentum investing as buying the best stocks of last 3, 6 or 12 months and holding them in hope the price advance will continue in the future. They view it as a blind strategy, where hordes of people buy a stock simply because it went up in previous period.  In their words, momentum stocks are very volatile and risky with high P/E ratios, and market participants involved in them are fools. This is a completely wrong perception. Anybody who thinks they can just buy last year's winners without any analysis and make money should visit a doctor. 

Momentum effect has been well documented by the academic community as well as fund management companies. Father of momentum investing, Richard Driehaus has long advocated this approach, along with Gerry Tsai (man who made Fidelity into a powerhouse), Martin Zweig, Philip Fisher, William O'Neil and many others. These fund managers have become legends by buying fast growing stocks in up trends for cheap prices. Do you think they just look at past year's winners and buy them every year? Probably not, nobody is that stupid.

My strategy is to use price momentum as a primary stock screener. In other words, I look at stocks making new highs for longs, and stocks going down for shorts. After that I apply various growth and value criteria (min. 10% sales growth, low debt to equity, high ROE, low P/S ratio) to narrow it down to a few stocks. These I check more thoroughly, and determine whether they have potential and are selling for a fair price.   

When a price moves up or down, there is usually a reason for it, somebody is buying or selling the stock and I have to know why. 

Wall Street and Financial Media divide stocks into various categories like growth, value, momentum, dividend and so on. They fail to see, that there is no need for division because it's all connected. As Warren Buffet said: "Growth is merely a part of value equation". When I am buying a stock, I want it to have a competitive advantage, high growth rates, be reasonably valued, and already in uptrend, if it pays a dividend that's a bonus. If it doesn't grow fast, is overvalued or in a downtrend I simply won't buy it. 

So what am I? A "value momentum growth dividend investor"! Sounds retarded, doesn't it? In fact I am just doing what every successful and intelligent investor advocates: Buy a great company for a good price and hold it as long it's making money. Price momentum is just a part (an important one in my strategy) of the whole process, and is a valuable addition to growth and value criteria in my opinion. 

I don't look at how much a stock made in the past 6 months or year. It doesn't matter at all. If you look at the winning stocks of past 100 years, they have one thing in common: all went up in price significantly and made hundreds of new highs year by year. When I look at stocks making 52-week highs today, I know there are many tomorrow's big winners there, and you just need to do the homework to identify them. Momentum definitely works as a great indicator, and does not deserve the "overvalued hype stocks" tag on it.

Do you have questions or comments about momentum investing? Post a comment below!



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eHi Car Services (EHIC) - One stop car solution in China

5/21/2015

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eHi Car Services is the largest chauffeured services car company in China, and second largest rental business in terms of fleet size. At the end of 2014, they operated more than 18000  vehicles in rental segment (70% of revenue) and 1300 vehicles in car services (30% of revenue) for a total of more than 19 000 (9800 in 2012). Fleet utilization stood at 71.8%, up from 70.5% in 2013. Number of covered cities also increased from 48 to 99. Ehi Car also operates a peer to peer sharing service similar to Zipcar.

Car rental in China is booming

Everyone knows that Chinese car industry has seen unprecedented growth in the last decade, car ownership increased significantly, although as of 2013 it was 101 cars per 1000 people, which is very low compared to USA's 800 cars per 1000 people. China has a big pollution problem, and the government already limits car ownership in certain big cities, not to mention scarce parking. Revenue in car rental market is rising much faster, from 9 billion yuan in 2008 to 34 billion yuan ($5.6 billion) in 2013  —and it is expected to reach 65 billion yuan by 2018 according to Roland Berger Strategy Consultants.

China has more than 13 000 car-rental firms, however the whole industry had a combined fleet size of only 369,000 vehicles in 2013, about 0.4% of the country’s passenger vehicles outstanding. Compare this to 1.6% in the U.S. and 2.5% in Japan. 

Competition

The industry has two major players, CAR Inc (Owned partially by Hertz Global) and eHi Car. Enterprise Holdings, largest car rental company in USA has acquired a 20% stake in EHIC, marking it's entry in China. CAR is a bigger company by any metric and also holds larger market share (7% according to Frost Sullivan), while EHIC stood at 2.1% in 2013. However, EHIC is growing revenes at a faster rate 50% vs. 30%. Both companies are investing heavily to expanding their fleets and number of cities, hence their earnings and cash flow are depressed (although CAR achieved profitability in 2014, with a 12% profit margin). Let's look at EHIC financial statements:
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Revenue growth is accelerating (50% vs. 26% in 2013), margins are improving, one warning sign is that receivables grew faster than revenues (89% vs. 50%). In the latest quarter, the company held more than 150 million USD in cash, which should cover a major part of their expansion plans. Long-term debt stands at 115 million, but EHIC generated 7 million in operating cash flow last quarter, so they should be able to repay it over time. The company is growing mainly by adding buying more cars and adding cities, but also thanks to an increasing average daily rental rate - 176 RMB from 163 RMB in 2013 (6% growth).

EHIC and Didi Kuaidi, China's Uber

The interesting thing about EHIC stock is, that in April 2014 they purchased 4.7 million preferred shares in Travice Inc. for $25 million, representing 8.4% of then outstanding capital. Travice operates Kuaidi Taxi application, which merged with Didi app, forming the largest car sharing application to fight Uber in China. The new company has a market share of 99%, significantly slowing down Uber, which entered late into Mainland China. Recent funding deals increased value of Didi Kuaidi to $8.75 billion, with Farallon Capital Management, Coatue Capital, Tiger Global and Alibaba (BABA) among investors.

EHIC still carries the original investment at a value of $25 million on their balance sheet, although their stake in the combined Didi Kuaidi entity is certainly diluted, even 1% would give them a value $87.5 million, or 11% of current market cap ($800 million). Value of this holding is expected to grow in the future, once they cement their dominant position and start monetizing the car sharing app.

Summary

EHIC is a fast growing company in an infant industry. I expect it to grow significantly, and achieve profitability in next 3 years. It might seem expensive at P/S of 5, but with possible profit margins around 10% (CAR Inc had 12% last year), accelerating growth and interest in Didi Kuaidi, EHIC stock offers a lot of potential. Their competitive advantage lies in the chauffeured services market, where the Chinese government selected them as their preferred transportation provider. Also, they signed a deal with Ctrip.com (CTRP), where they provide pickup and transport from airports to corporate clients and individuals. CTRP also invested $100 million into EHIC.

Before it went public, there were allegations that the company misrepresented it's statements and conducted fraud. These were not yet confirmed, as I couldn't find any hard evidence, also short float is quite low (8%). I think the stock offers big upside at current prices, with some risks which are worth taking. I am going long today (5% initial position), with a stop loss like always. Tiger Global and SRS just announced a private placement to invest in EHIC stock, we will see what it does today but I will definitely buy this company.

Good luck in investing!
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LDR Holdings (LDRH) - Leading player in spine artificial disc market

5/20/2015

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LDR Holding Corporation is a global medical device company focused on designing and commercializing novel and proprietary surgical technologies for the treatment of patients suffering from spine disorders. Their primary products are based on VerteBRIDGE fusion and Mobi non-fusion platforms (cervical disc), both of which are designed for applications in the cervical and lumbar spine. 

Background

In August 2013, LDRH received approval from the U.S. Food and Drug Administration, or FDA, for the Mobi-C cervical disc replacement device, the first and only cervical disc replacement device to receive FDA approval to treat both one-level and two-level cervical disc disease. LDR was founded in France by Christophe Lavigne, Patrick Richard and Herve Dinville, who still own a significant part of the company.

According to the company, their VerteBRIDGE fusion solution offers a less invasive solution to patients, and it was used more than 80 000 times globally since 2007. Their major product and growth is Mobi-C, a cervical disc replacement device, with patented mobile design, made to replicate natural anatomical movement of the spine. It is also the only FDA approved device, to show clinical superiority to two-level traditional fusion. Here are the results of tests:

  • Overall trial success was 69.7% for Mobi-C and 37.4% for fusion, which represents statistical superiority (p < 0.0001).
  • The rate of secondary surgeries at the operated level for Mobi-C was 3.1% versus 11.4% for fusion.
  • The percentage of subjects who demonstrated adjacent segment degeneration (determined by x-ray) was:
    • 2.9% of Mobi-C patients compared to 18.1% of ACDF patients at the inferior adjacent level
    • 13.1% of Mobi-C patients compared to 33.3% of ACDF patients at the superior adjacent level
  • Mean return to work time was 20.9 days shorter for Mobi-C patients compared to fusion patients.
  • 78.2% of Mobi-C patients showed improvement in Neck Disability Index (NDI) based on the FDA success criteria versus 61.8% of fusion patients.

In other words, when you have problems with back or spine, doctors would put screws inside your body to fix it, which is not so comfortable and usually painful. With Mobi-C, the procedure is less invasive, and claims to offer patients better movement capabilities. The company estimates, that 30% of U.S. patients indicated for anterior surgery with symptomatic cervical disc disease may be candidates for disc replacement procedures. 

LDRH has over 400 patents globally, out of which 33 are in US, with 100 global pending, 31 in USA. The U.S. spine surgery market is expected to grow at 7.5% for the foreseeable future, with the cervical disc replacement market growing much faster.


Financials
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LDRH's revenue growth has accelerated, from 16% in 2012 to 26% in 2014, and 31% in Q1 2015. More importantly, revenues from exclusive cervical products segment (Mobi-C) grew 49% (47% in Q4 2014), which shows that the product is gaining momentum among physicians in US. Approximately 20% of revenue comes from outside America. However the company still expects to spend significant amounts of money for marketing and training of doctors, and probably will not generate any profits in the future.

LDRH has 65 million in cash as of March 31st 2015, and 56 mil. in total liabilities. Inventory and receivables are growing in tandem with sales.

Competition

Market for spine treatment medical devices is competitive and crowded, with Medtronic leading the herd. However, there are hundreds of different procedures and various defects, and many companies with individual products made specifically to address these problems. LDR Holdings is one of them, it has a superior product to traditional methods of fixing certain spine disorders, with no direct competition in sight (Medtronic is developing a similar device, it's approval and launch are a question of months and years). Also, the FDA approval creates a barrier to entry, because a potential competitor has to prove that his product is not only superior to traditional methods but also to Mobi-C disc.


Summary


LDRH stock trades at a P/S multiple of 7.3, with no profits or positive cash flow. It has a product with competitive advantage, and accelerating revenue growth. I believe the health care industry will grow for years to come, with the developing countries population aging, thus increasing spending on medication. Not to mention remarkable growth in emerging economies like China and India, where the health care spending to GDP is still at very low levels. Valuation of LDR might be high, but with growth accelerating and a competitive advantage, I believe this company has a lot of potential. If my analysis is wrong, I will take a small hit and find another great stock. However, If I am right, LDRH can grow significantly for at least next few years and reward it's shareholders.

LDRH has a Zack's rating 1 (Buy), and according to insidermonkey is also held by Richard Driehaus, father of momentum investing. I am going long at open today with a stop loss. Good luck in investing!
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HubSpot Inc. (HUBS) - A Momentum stock with high potential

5/18/2015

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Outside of the world of Internet marketing, Hubspot is a little known company founded in 2006 by Brian Halligan and Dharmesh Shah. It is a pioneer in field of Inbound marketing, that is SEO, content management, social media marketing, videos and others. Started out of MIT, HUBS later received venture funding from Sequoia Capital, Google Ventures, Fidelity and SalesForce.

HubSpot is a software for companies and marketing agencies, which helps devise a low-cost, modern and aimed marketing strategy. According to the company, customers no longer respond to traditional advertisements (TV, newspaper, display ads) or e-mail campaigns, instead look for opinions on products or google or social media. Their site and blogs attract 1.5 million unique visitors every month, with more than 2 million followers across Facebook, Linkedin and Twitter. Basically, they do what they say and get most customers through inbound marketing. 

Their estimated market is 3 million businesses in USA and EU, which have a web presence, while only 3% of them rely on modern marketing methods. As such, it is only at the beginning although it has already become a standard in marketing agencies (over 2200 already use it). Although the software has scale, HubSpot focuses on small and medium sized businesses (20 - 2000 employees), where it believes it has a competitive advantage and can offer the best product. According to several software review sites, they are no.1 in SEO (Search engine optimization), marketing automation and social media marketing.

Let's take a look at some numbers:
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Hubspot 5- year financials

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Tableau Software (DATA) - Overvalued or good investment oportunity?

4/26/2015

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Tableau Software is a data visualization company, that aims to bring cheap analytics to millions of business owners and regular users. Based on core technologies originally developed at Stanford University, their products reduce the complexity, inflexibility any expense associated with traditional business intelligence applications. DATA makes 32% of revenues from Maintenance and Services (growing by 83%), while 68% comes from software licensing (75% growth YoY).

DATA is a first mover in Big data analytics industry, which is expected to grow by at least 25% until 2018 to $46 Billion (source ReportsnReports.com). Investment bank Cowen and Co. expects Tableau to capture 30% of business intelligence license market by 30%. According to Tableau's website, total data volume will reach 20 Exabytes by 2020, growing by 48% annually.

Companies like Microsoft and IBM have already realized the potential of this business and are developing or have already launched their own products. While they have larger resources than Tableau, no big data analytics company grows revenues and acquires customers as fast as Tableau. They are reinvesting all money into sales and R&D as can be seen on their financials:

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Wall Street expects revenue growth of 70% for this stock, while management is more conservative at 45%. The tricky part about Tableau Software are it's profits. Since the company reinvests everything back in the business, it is hard to tell what it's margins will be. As such it is difficult to compare it to any other publicly available stock. Only QLIK Technologies (QLIK) comes close, trading at 5x sales (vs. 17.5 for DATA), although they grow much slower at 20% per year. Valuation is very difficult, when there are few companies to compare to and DATA generates no profits.

Why I'm going long

Tableau offers free trials on most of their products, so customers can try them out easily and decide whether to pay for more or not. Vast majority of accounts expand over time, which demonstrates that the software is popular and can spread quite quickly. Revenues are growing quickly, and Wall Street has noticed this stock some time ago, which is also reflected in it's valuation. DATA has demonstrated innovation and acquires customers at an incredible pace. Their customer conference, which is meant to build a community of enthusiasts and get feedback for their products had 180 attendees in 2008, and 5500 in 2014. At the end of last year, Tableau had 13 patents issued for their software and 25 more pending. One big risk is their issuance of stock, last year they increased number of shares outstanding by 11%, what's always a big risk in technology stocks.

I believe the company has a lot of market potential with current products, plus can develop market leading software for the future. Going long today at open with a stop loss like I always do (wouldn't recommend buying this stock without SL).
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