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My “Early Warning” System for Maximum Tech Profits

1 | By Michael A. Robinson

If you want to learn how to double your money investing in high-tech stocks, let’s take a look back…

Tesla Motors Inc. (Nasdaq: TSLA), the electric carmaker found its shares up 457% for the year to date at the end of September 2013  – including a five-day surge of 52%.

Today, let’s take a few minutes to understand the five catalysts behind what was happening there.

All five of those catalysts are the same things we still hope to see when searching for stocks about to burst – so today’s investors will find this history lesson worth studying.

Let’s crack the books…

Going on a Rocket Ride

On May 8, 2013, Tesla stunned the markets: It not only announced its first-ever quarterly profit, but it reported a bottom-line figure that was three times what analysts had been forecasting.

The next day the stock jumped 24% on massive volume.

And that was just the start.

Following that earnings report, Tesla’s shares zoomed from $55.79 to $188.64 – a stunning gain of 237%.

The share-price surge was supercharged by a second earnings “surprise,” another set of better-than-expected results that the carmaker reported Aug. 8, 2013.

As someone who watched this very closely at the time, I can tell you that this impressive run confounded short-sellers, transformed company CEO Elon Musk into a business rock star and gave Tesla the kind of cult-stock status that Apple Inc. (Nasdaq: AAPL) enjoyed during the Steve Jobs era.

Tesla’s 2013 share-price saga will now achieve one other result – one that I consider to be very valuable.

It will educate you.

You see, it gives me the chance to go over the concept of a stock market “catalyst.”

Think of it this way: If every stock houses a rocket engine that sits cold, dormant and quiet until something ignites it, then a catalyst is the match that lights the rocket’s fuse.

And we all know what happens once a rocket engine fires…

What’s really great is that – even after the rocket engine on a stock is ignited – you still have time to buy the stock and hop aboard for the wild ride higher.

And that means a catalyst is also a kind of “early warning” signal telling us that there’s lots of money to be made in a particular stock.

There are several types of catalysts, and today I’m going to show you my favorite ones.

I’m also going to show you a couple of stocks that could be looking at Tesla-like “liftoffs” – thanks to the catalyst events that I’m going to tell you about now.

The Five Top Catalysts

Early Warning Signal No. 1 – The Best Surprise Is an Earnings Surprise
Let’s be honest: It is human nature to keep score. In school we compared report cards, or GPAs, to see who the best was. In the job market, folks compare their salaries. Sales folks compare commissions.

In the stock market, analysts look at quarterly results – studying the “top” (sales or revenue) and “bottom” (earnings or profits) lines for both absolute results and for sequential (since the previous quarter) and year-over-year growth. It’s kind of a game: Analysts make forecasts, and companies do their darnedest to beat those estimates.

Companies that develop a reputation for “beating the Street” are often rewarded by having their shares trade at premium valuations – a higher-than-normal price-earnings (P/E) ratio, for instance. And, like anything else in life, there’s a “bandwagon” effect – as more and more investors buy into the company’s prospects.

Tesla was on that path.

It was 10-year-old company, but it had only recently become profitable back in 2013. That’s partly because it was ahead of the curve in terms of the electric-car market. The “green” car market has finally reached a critical mass in terms of buyers. And the competition is thinning out…

Rivals Fisker and Coda had all but collapsed.

And we were seeing “financial engineering” in the sector, too: Tesla was able to sell zero-emission-vehicle credits to conventional carmakers, generating $68 million in revenue as a result.

All of this made Tesla an intriguing case study in the power of earnings surprises.

Tech Stock Catalyst No. 2 – Guiding Heavy, Guiding Light
As a young boy growing up in 1960s, I still remember the popularity of the daily soap opera” that appeared on television. One I recall, in particular, is The Guiding Light.

I thought of that today because “guiding light” – coming out and telling Wall Street analysts that their earnings forecasts need to be slashed – is something a savvy CEO learns never to do. Your stock price almost certainly gets a “haircut” (Wall Street code for a financial scalping) as a result, meaning your investors lose millions of dollars instantaneously.

Investors hate bad news – as well as uncertainty.

So CEOs have learned a new dance step. And it’s called “forward-looking guidance.”

In recent years, in an effort to excise some of the uncertainty as it relates to their own companies, many CEOs have started giving a preview of the earnings report that is known as “forward guidance.” Part way into a quarter, the company will round up all the analysts who follow it and let them know how business is doing.

We’ve already seen how a positive earnings surprise can boost tech shares (conversely, a “negative” earnings surprise can sink a stock like the iceberg that scuttled the Titanic).

The same relationships exist with “guidance.”

When a tech firm issues guidance that is well above what Wall Streeters had been expecting, the share price can get a hefty bump.

But when that guidance upgrade involves a firm in a particularly red-hot sector, that hefty bump turns into a rocket launch.

That was certainly true with shares of 3D Systems Corp. (NYSE: DDD). The firm was already on a major tear because it is a key player in 3D printing.

3D printers allow companies, inventors and consumers to build their own objects from scratch by following a digital blueprint. The machines work by laying down successive layers of special powders combined with a bonding agent to make anything from car parts to custom dentures.

On Oct. 25, 2012, 3D Systems announced that it was raising its financial guidance for the year to between $1.20 and $1.30 a share. That compared with the average $1.12 a share analysts had expected.

After that announcement, DDD took off. No doubt, it remained volatile as it advanced. But in the roughly 11 months between when that news broke and its closing price on Sept. 20, 2013, the stock was up 96%.

As we’ve talked about in past Strategic Tech columns, this is a sector with a massive upside potential. And we’re barely past the starting line…

Tech Stock Catalyst No. 3 – Look What We Did
The early-stage biotech sector is a lot like the Wild West in that it’s not for the “tenderfoot” investor. But if you know what to look for, it can feel like you discovered gold at Sutter’s Mill. These are small-cap companies that are still in the research-and-development stages, meaning they aren’t even close to having a new drug or therapy out on the market.

But the very same profile that makes them risky also can ignite a nearly vertical ascent when a strong progress report is made.

Just look at Pharmacyclics Inc. (Nasdaq: PCYC), which developed the blood-cancer drug Ibrutinib with Johnson & Johnson (NYSE: JNJ) – and is now owned by AbbVie Inc. (NYSE: ABBV).

The U.S. Food and Drug Administration granted the drug a special new “Breakthrough Drug” status in mid-February 2013, and Pharmacyclics went on to soar from $77 to $131 – a gain of 70%.

And then the “bandwagon” formed. Analysts ramped up their target prices on Pharmacyclics – with Deutsche Bank saying the biotech was worth $170, or 121% more than where it was trading before the new FDA designation was granted.

And Ibrutinib hadn’t even been approved, yet.

Tech Stock Catalyst No. 4 – Look Who We Hired
If you’re a corporate director of a company that Wall Street thinks is a dog and you want to change that perception, change the conversation. And one way to accomplish that is to bring in new management.

One example that I talked a lot about with my colleagues here at Money Map Press was the case of Marissa Mayer, who Yahoo Inc. (Nasdaq: YHOO) recruited in a 2012 fourth-quarter, Hail Mary attempt to make the once-top-ranked Web firm relevant again.

Mayer made some bold – even controversial – moves to shake up Yahoo and ignite growth.
She didn’t just change the conversation about Yahoo – she actually had investors paying attention again.

And, you can’t criticize the share-price performance: In spite of the howling, July 17, 2012, when Mayer took over at Yahoo, and late September 2013, Yahoo’s shares screamed 96%.

Tech Stock Catalyst No. 5 – Two Is Better Than One
Corporate spin-offs are one of the biggest moneymakers you’ll find as an investor, but I’ve found through the years that very few retail investors know much about them. The anonymity of this particular transaction doesn’t really surprise me a lot, because I also know that spin-offs get almost no coverage in the mainstream press.

But if you know what to look for, they can offer enormous upside…

Spin-offs occur when a company’s management team realizes that the pieces are actually worth more than the whole. Maybe the company runs two different businesses, and because they’re mashed into one monolithic company, the market isn’t fairly valuing the enterprise. The CEO believes he or she can do a better job by splitting the firm into two separate and independent companies.

The great thing for shareholders is that they usually get shares in the new firm for free as a special dividend before the spun-off company has its IPO. And history shows this event is a great catalyst for shares of the new firm.

A Lehman Bros. study found that spin-off companies beat the market by 40% in the first two years, while a Penn State University study found a three-year return of 76% – which was enough to beat the market by 31%.

Here’s the coup de grâce: Many spin-off companies are ultimately taken over at hefty premiums to their market price.

No wonder the spin-off of Prothena Corp. PLC (Nasdaq: PRTA) – formerly a unit of Irish drug firm Elan Corp. PLC (NYSE ADR: ELN) – was such a smashing success. Shares of the small-cap drug-discovery firm began trading on Dec. 27, 2012. By late September 2013, Prothena’s shares were up more than 200%.

Elan also did well for its investors. After the spin-off took place, ELN soared 54%, nearly triple the 19% gain of the Standard & Poor’s 500 Index for the same period.

Obviously, a big part of my role here at the Strategic Tech Investor is to develop recommendations that will generate big profits for you.

But I also want you to have the benefit of my insider experience, to know and understand the language of Silicon Valley, and to understand strategies that will give you a big advantage over other investors – and especially over the lemmings of Wall Street.

I’ll be back next week with that special series I’ve been “teasing” you about. I promise: It will be worth the wait.

Have a great weekend.

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[Editor’s Note: I welcome your comments. And your questions. Tell me what’s on your mind… share with me your investment stories… and let me know what excites you in technology right now. It’s great hearing from all of you each week.]

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One Response to My “Early Warning” System for Maximum Tech Profits

  1. Jean Goodnight says:

    I appreciate the comments on pharmaceutical companies. We have a serious neurological disease that’s been ignored since 1937, after the death of an American “icon”, the late Dr. James Ramsay Hunt. Ramsay-Hunt Syndrome enters the ear and moves to the brain affecting the entire bodily system. We have searched for a long time but unable to find a doctor who knows how to treat RHS or anything about the doctor who discovered it in 1907. Dr. Hunt was a world renowned neurologist and father of neurology in the United States. US and Canadian doctors know nothing about this terrible disease. and people with the disease have nothing except to fend for themselves. This is not a rare disease. Its’ rare only because doctors know nothing about it. If anyone knows of a doctor, medical researcher or pharmaceutical company who can treat this disease, please contact me.

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