When it’s time to dream big in the stock market, you need an action plan. You can’t just buy shares in companies with services and products you like — that’s a chump’s game.
If you buy with your gut, you will end up with a hole in your wallet and your stomach in a knot.
You need an overall strategy, and then a set of tested tactics to execute on that strategy, and finally both the courage to stick with your convictions when you encounter a rough patch while at the same time having the humility to admit defeat when you’re wrong.
Ideally for potential new tech hotshots, I look for smaller companies that have gone public only within the past year or so that operate within a specific niche or segment of the market that I have identified as being ripe for explosive growth.
|Smart, well-managed, fast-growing technology firms are worth putting on your radar as future stars.|
Nine out of 10 times these will be technology-driven companies with a unique product or service that offers a decided advantage over peers. In fact, because new technology is at the heart of so many new breakthroughs, some of these firms don’t even have peers yet.
In essence, we are looking for smart, well-managed, fast-growing technology firms we believe have the potential to continue to provide exceptional growth over the next five years. Some could advance 1,000 percent-plus, while a couple may go to zero. But they are worth putting on your radar as future stars.
A perfect example is Cornerstone OnDemand (CSOD), which is up over 180 percent since I first profiled it on April 30, 2012. Cornerstone is a provider of cloud-based learning and talent management software designed to help clients manage their employees. Their software helps businesses hire the right people, evaluate them, develop their skills and manage compensation.
Two years ago, the firm had 7 million users in 150 countries. Today that has ballooned to over 14 million users in 191 countries and 41 languages. That’s the type of explosive growth we are looking to identify.
In addition to having a dynamic product or service, one of the keys to being able to grow at this type of rate is having a large enough market. In the case of Cornerstone, despite its phenomenal growth, it logged only $185 million in 2013 revenues in a target market that is over $4 billion in size. The opportunity that exists is akin to throwing a pebble in Lake Michigan.
Think of CSOD as an early version of human resources company PeopleSoft, but without the need for companies to buy servers or invest heavily in infrastructure because everything is delivered online. And just as PeopleSoft was gobbled up by Oracle for $10 billion, we fully expect stocks like CSOD to garner the attention of potential acquirers.
Another example is Greenway Medical Technologies (GWAY), which was acquired by private equity firm Vista Equity last September. Greenway was recommended to me by a reader who is a physician and uses its products in his practice. The company provides web-based software solutions to the health-care sector, which is in the midst of a huge transition to electronic health records.
Once I took a deeper look at Greenway, it was a no-brainer that this little company was headed for explosive growth. It had carved a niche providing an integrated database to physician practices and hospitals that included an EHR, accounts receivables, patient registration, scheduling and reporting, all integrated with each other.
When I profiled it, the company was only doing $30 million in annual revenues in a sector where the largest vendor, $3.2 billion company Allscripts (MDRX) only controlled 14 percent of the market. Once again, I had identified an upstart with a unique product servicing a huge market that didn’t have any dominant leaders.
Vista Equity saw what we saw and quickly scooped up the company less than two years after it went public. Although readers were able to garner a 34 percent gain out of Greenway, we were sad to see it acquired.
Most investors are excited to see the companies they own get acquired at double-digit premiums, but not us, at least not for this strategy. Remember, we are looking for 1,000 percent gains from these explosive companies. We are looking for the next Apple (AAPL), Amazon (AMZN) and Priceline.com (PCLN), but before they reach their tremendous potential.
If you cornered me and made me explain the strategy in one sentence, this would be it: “Newly public technology firms with a unique product or service with phenomenal market potential.” Often, companies like these will stumble a bit after the euphoria of the IPO wears off, but we are willing to be patient because we believe in them and their market-crushing potential.
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