The Total Wealth Tactic That Makes Analyst Expectations YOUR Secret Weapon

Keith Fitz-Gerald Apr 29, 2015
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Apple’s most recent earnings were nothing short of spectacular, and the headlines reflected that:

… Apple Beats Estimates on Soaring iPhone Sales – The Street

Apple Beats Estimates with $10.2 Billion in Profit – Appleinsider.com

Apple Crushes iPhone Estimates, Boosts Buybacks – CNBC

What they should have said is “Analysts Got It Wrong Again.”

We’ve talked in the past about how far off the mark Wall Street analysts can be, and how costly that can be for investors who blindly follow along. It’s no surprise – or at least it shouldn’t be – given the hidden biases Wall Street holds.

But we haven’t talked about ย how to use that information to your advantage.

Until today.

Here are the two best presents analysts could possibly give you this earnings season.

Not many people realize it, but analysts’ opinions are very short-term in nature. They’re intended to reflect market potential over the next 30-60 days. They’re also aimed squarely at institutional investors who are likely to move into or out of specific holdings at the blink of an eye. Not individuals.

It makes no sense, for example, that Boeing reports quarterly numbers when its products are sold over a multi-year sales cycle. Nor does it make sense that a company like Alibaba gets a 17% haircut at a time when it reports EBITDA (earnings before interest, taxes, depreciation, and amortization) of only 58% at a time when it grew by 40% year over year.

Most CEOs would give their right arm to have that problem, yet Wall Street has gone to great lengths to convince investors that growth at any cost is a better approach than having real products with real profits.

What you need to understand is that most analysts are great at seeing the trees but not the forest. It’s not uncommon for them to miss the bigger picture. They are so myopically focused that they can’t see what a company is really doing, nor can they understand an opportunity that takes them beyond what they already think they know.

Especially when there are real products involved in markets that are changing quickly.

Take Natural Grocers by Vitamin Cottage Inc. (NYSE:NGVC), for example.

Analysts Punished This Stock – and Cleared the Way for 74.76% Gains

I recommended the company to Money Map Report subscribers as a way to play the fastest-growing sector of the global food industry: the demand for organic food. At the time, it was almost completely unknown and unfollowed. The company’s fundamentals were stellar: NGVC had no debt and double-digit earnings growth year-over-year, with an aggressive expansion plan in the works. Readers who followed along had the opportunity to make gains of 43.37% in less than seven months.

Then, just months after I recommended that my Money Map Report readers capture those profits by strategically exiting the trade, traditional analysts got to the stock.

On May 1, 2014, NGVC reported Q2/2014 earnings that showed a 22.4% increase in net sales, a 5.7% increase in comparable store sales, and a 24.3% increase in net income year-over-year. Its gains in net profit margin were also unimpeachable, improving by 28.4%.

But NGVC forecast comparable store sales growth of 5.5-6.5% going forward, down from the 8.5-9.5% improvement analysts were “expecting.” The result was a 36% plummet in the stock price that day, even as the company recorded strong growth in almost every other metric imaginable.

While headlines lamented the “decline,” savvy investors loaded up. Anybody who missed NGVC’s double digit run the first time was handed a second chance on a silver platter.


Click to Enlarge
Source: Yahoo!Finance.comUltimately the stock bottomed in early October that year at $15.89 a share. Today it trades at $27.77, which represents a hefty 74.76% return.

This is by no means an isolated situation. Analysts frequently create “expectations” that result in great buying opportunities.

Alibaba, for example, was in much the same situation last January when it got tanked after missing EBITDA by 2% despite reporting year-over-year growth of more than 40% and profits that Amazon would love to have.

Today the stock trades at $85.08, down from a 52-week high of $120 a share. It’s a compelling bargain for anybody who understands that the average quarterly earnings growth rate is now projected at 80% at a time when the forecasted quarterly revenue growth is 30.87% according to Ft.com. The company’s profit margin is 38.09% and its return on equity is 29.54% according to Yahoo!Finance.

If Alibaba – with real products, real cash flow, and billions of consumers using it – is even half as profitable as I envision in the years ahead, every quarterly report that “misses” is going to be the financial equivalent of an engraved invitation to buy more over time.

I call this phenomenon the “analyst opening” because that’s what they’re really creating… a king-sized opportunity for you. They’re opening the proverbial door for profits. All you have to do is have the knowledge and the chutzpah to walk through it.

Here are two more ready-made “analyst openings” for your consideration.

Analyst Opening #1: Chipotle Mexican Grill Inc. (NYSE:CMG)

Chipotle Mexican Grill Inc. (NYSE:CMG) reported Q2/2015 earnings on April 21, 2015. By all standards, it was a sterling report. Revenue increased by 20.4%, crossing the $1 billion threshold for the first time. Net income clocked in at $122.6 million, which is a staggering 47.6% increase. Diluted earnings per share were also up 47%.

Best of all, the store announced it had opened up 49 new restaurants over the quarter. That’s terrific evidence that Chipotle is following through with a sweeping expansion plan.

Yet, the stock tanked 7.5%. Seems analysts weren’t impressed by the 10.4% growth in same-store sales that Chipotle reported. They had predicted 11.8%.

The way I see it, now’s a particularly exciting time to get in on Chipotle. Not only is the stock at a discount, but the chain recently made news by becoming the first major fast food operator in America to denounce genetically modified food (GMOs) and remove them from all ingredients in every product it sells.

This is a huge step forward in the organic food sector which is now a $100 billion market with a compound annual growth rate of 14% a year according to Information Resources, Inc. and SPINS. It’s also a massive crowd pleaser if for no other reason that millions of people are tired of eating ingredients they cannot pronounce.

Analyst Opening #2: Shake Shack Inc. (NYSE:SHAK)

The most celebrated new burger company in America isn’t due to report its earnings until mid-June, but it’s still riding high from the overreaction to its last earnings report. Too high.

In March, Shake Shack Inc. (NYSE:SHAK) reported a net loss of only $0.01/share. That’s impressive for a new company that’s still spending very heavily on research and development, and even more impressive when you contrast it with the $0.03/share loss analysts were predicting.

Shake Shack’s stock has been on fire since analysts were found to have lowballed it. Now, though, it’s got the opposite problem in that it’s insanely overvalued.

The stock currently has a price-to-earnings (P/E) ratio of 982.71 according to Yahoo!Finance. To put that in context, that’s 11.56 times the average 84.95 PE ratio the rest of the restaurant/dining sector sports! If that doesn’t give you pause, what this number means in plain English is that you’ll have to wait 982.71 ย years to make back any money you invest in the company today back based on current earnings and price.

I think Shake Shack analysts have created a prime shorting opportunity. Even if Shake Shack surprises analysts again in June, history shows very clearly that its lofty PE ratio simply isn’t sustainable, any more than Twitter’s stock price of $70 a share was in January of 2014 when I recommended Money Map Report subscribers short it under similar circumstances.

Shake Shack is due for a shake out.

In closing, I’ve obviously been tough on traditional analysts to the point where you might wonder if they’re all worthless. They’re not. In fact, many are really intelligent people. They’re just trapped by a system that wants to separate you from your money.

Never forget that the key to Total Wealth is to do what Wall Street does… not necessarily what it says.

At least in traditional analyst reports anyway.

Until next time,

Keith Fitz-Gerald

16 Responses to The Total Wealth Tactic That Makes Analyst Expectations YOUR Secret Weapon

  1. Frank says:

    Hi Keith,
    I was wondering if you have anything new on EKSO Bionics Holdings.You recommended a few weeks back and it has taken a sharp decline since.You were very positive on the company.I do realize these low price stocks can be very volatile.
    Thanks.

    • Keith says:

      Thanks for asking, Frank.

      It’s a high beta stock and a small cap to boot which means that it’s going to come under pressure as the broader markets have recently. Still, I am watching it carefully and I see a growing company making all the right moves needed to charge ahead.

      Best regards and thanks for being part of the Total Wealth Family,

      Keith

  2. James Jones says:

    If analysts’ statements reflect quarterly or short-term focus, shouldn’t short- to medium-term option traders also take the analysts views seriously? For example, a drop represents an opportunity to enter short put verticals. The question is always how much movement to expect in how much time.

    • Keith says:

      That’s an excellent observation, James.

      It’s not that analysts shouldn’t be taken seriously…they should. It’s their message that can be suspect. Depending on your trading style, risk tolerance and objectives, you can then learn to read that appropriately. If you’re short term, for example, you can use that to create put verticals, sell premium or just buy ITM options. If you’re longer term, perhaps waiting for some bottoming then buying upside is more your style.

      Either way, the analysts open doors for savvy money.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  3. Dale says:

    Keith I was thinking that if interest rates go up, would that not help the country? My logic being it would force people to put more into savings and hopefully pay off their debt. Just a thought.

    • Keith says:

      Funny you should mention that, Dale.

      The most recent GDP data that everybody is so concerned with actually reflects just that. Disposable income adjusted for inflation rose at a 6.2% annualized rate which is the highest in 2 years. At the same time, the savings rate jumped to 5.5% which is the highest since 2012. Those two things are signs of a truly normal economy rather than the leveraged up to the eyeballs spending we’ve seen coming into the Financial Crisis. Debt naturally falls as a by product of these, at least according to history anyway.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  4. Laurie says:

    Hi Keith,
    I really appreciate your insight. Would you be willing to write an article outlining the 10 stocks you’d recommend buying on the dip when the market corrects? I predict that Apple would be one, based on your prediction that it will reach $200 in a couple years. Ekso Bionics, also. What other 8 would you likely buy?

    • Keith says:

      That’s a great idea, Laurie. Thank you!

      I’ll get cracking so please stay tuned.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  5. Jerry says:

    BABA was down yesterday as it seemed to react to a internet article that stated Jack Mau has put a hold on hiring. They have 30,000 employees. I think the market took it as a precursor to maybe a slow quarter to be announced on 5/7. Are we to remain confident is BABA? It seems that the internet is a tool for some to manipulate stocks. Bad things can be said and have little consequences. Truth has to to absolute.

    • Keith says:

      Good morning Jerry.

      I wouldn’t place too much stock in a hiring freeze. Jack Ma knows what he’s doing. Don’t forget that BABA is a real business with real cash flow and serious margins to boot (35% give or take) that other western competitors would love to have. As people’s wealth grows, they consume more so BABA is likely to cash in for a long time to come, particularly as it pushes into international markets.

      As for the Internet, no doubt about it. Unfortunately, many less than ethical traders and funds do exactly that and plant Internet related stories that have little or no basis in fact allowing them to earn outrageous profits and causing millions of investors plenty of heartburn.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  6. NEVILLE says:

    KEITH ,Yes i have one comment .( A PICE OF ADVICE) Most companys should record the conversations of their employes, that would open their eyes to what their employes are saying to there clients ,and the attitude they project.
    Not every client has the knowledge and experence of some people and belittling your clients does not help your business to grow. What a pity for such a well respected company should have these problems.
    Before i sold my company which was the largest company of its kind at that time my employes were told i dont pay you the customers pay you.
    Thank you for taking the time to read this.

  7. Louis Sack -How Much? says:

    I haven’ done business with you but I will watch for your next presentation

  8. Jacki says:

    I’m 70 and new to you, but am trying to absorb your books, booklets, and daily emails. I have money to invest at the right time and right place, but your daily papers seem to be wanting me to subscribe to more when I already feel overwhelmed. Half my money is in Roth IRA and the other half is in accessible accounts. I want to protect my wealth and of course make some, but it is still unclear what I should do and when.

  9. John Ernst says:

    Any recommendations on “Internet of things” stocks or an Etf Thx JErnst

  10. Mark H says:

    Centene(CNC)
    Provides managed care programs & related benefits under Medicaid, including Supplemental Security income & the State Health Insurance Programs & State Ins. Programs. Is there a Lowball support area to place an open buy order?
    Please reply,

    Mark

  11. Roy Yamamoto says:

    I receive newsletters, but at 70 plus years I am new to investing and sometimes It is hard to understand the newsletters but I am still willing to try.
    I have one question. How and who do you order the stocks from? I just wanted to try my hand at investing in stocks. I don’t have much money but I still want to give it a try.
    Thank you

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