Concur Technologies: Bull vs. Bear
Reasons for Optimism
Stocks Hitting New Highs
Back on June 4 (over a month ago), I ended my Cabot Wealth Advisory column with a recommendation for Concur Technologies, writing the following:
"Concur Technologies (CNQR) has a great chart, indicating that growing numbers of investors are becoming aware of the stock, learning about the company's business and investing in it because they think the future is bright.
"If you're a user, I don't need to tell you about it.
"If you're a user, you may already be an investor in the company!
"But if you're not, here's what you should know.
"In 19 years, Concur has grown to become the world's leading provider of integrated travel and expense management solutions.
"It has over 15,000 corporate clients with more than 15 million individual users in more than 100 countries.
"And it's still growing at a good clip, with revenues up 28% in its fiscal second quarter.
"That's all good, but last week the story got even better.
"Last week, the company announced it had been selected by the U.S. General Services Administration (GSA) to manage online travel booking, authorizations and voucher processing for all Federal Agencies. That's huge news, given that the GSA has about three million civilian employees.
"The stock spiked higher on big volume on the news, and broke out to a new high two days later as the broad market (thanks to Spain) rallied to provide a supportive environment.
"That means the stock moves to near the top of my watch list. If it does well, I may write about it again.
"But if you really want to be assured of continuing coverage of the stock for as long as it remains attractive, I recommend you take a look at Cabot Top Ten Trader, which recommended the stock a month ago and continues to follow it."
Well, today I'm writing about Concur again, but not because it's done well--though it has; it's up 2.6% while the S&P 500 is up 1.3%.
I'm writing about it because among the responses to that column were two that stood out.
The first was bullish on the stock, yet distracted by insignificant details, writing this:
"Your article on this stock was very interesting and I am going to take a serious look at the stock.
"There are two points in the article that deserve comment.
"First, the assumption that a contract with GSA is great news. Yes, there will be plenty of business. However it may cut down the profit margins, rather than raise them. How so? Contrary to popular opinion, not all elements of the government are the same. While Congress regularly encourages contracts in the defense industry, which have generous terms for the contractor such as the no-bid contracts given to Cheney's company, most contracts are very competitive. Unfortunately, the politics of the situation give the impression that all contracts are wasteful. (That goes along with the totally infantile belief that government is a failure unless I get 100% of what I want.) So let's be clear here, a contract with the notoriously penny-pinching GSA is not going to be generous. Sometimes those decisions are pound foolish, but when the corporate culture is low cost forever, such things happen.
"Second, when I retired as a DOD civilian in 2001, there were about 2 million civilian employees in all branches of the federal government. It has not grown since then, and certainly not by 50%. So where would the 3 million figure come from? By adding in the number of those in uniform, i.e., the military? I strongly suspect that is what the press release about the contract with GSA said. If not, it was wrong.
"We have enough trouble with misperceptions about the federal government without a noted publisher adding to the lies circulating out there. By the way, about half of the federal work force is in the DOD."
The second correspondent was bearish on the stock and wrote this:
"You must be kidding. I have followed this company for several years and in my opinion this company is run more for the benefit of the officers and directors than I personally have found for any other publicly traded company in my universe. Up until 2010, the company reported earnings on a GAAP basis and earned .50 for the year. In 2009, the company reported .38 and raised cash by selling stock in the company to Am Express. At that time, CNQR had no long-term debt. The following year they issued bonds and raised around 350M. Interest wiped out GAAP earnings so they began reporting and issuing guidance on a non-GAAP basis as GAAP earnings dropped to a negative .20. As non-GAAP earnings dropped, they became creative and started reporting non-GAAP, pre-tax earnings. Who else reports earnings in this manner? Non-GAAP for 2009 was .72, 2010 was .76 and 2011 was .59 while revenues grew 20%+ per year. They found that by greatly increasing stock-based compensation they could increase their non-GAAP pre tax earnings. In 2009, stock-based compensation amounted to .23 per share. In 2010, it increased to .37 and in 2011, it jumped to a whopping .65 per share (10% of revenues). The Chairman of the Board and the CEO have both sold stock over the last three years netting over 25M each. Not bad for a company not making any money.
"The balance sheet shows intangible assets of $115M and goodwill of another 281M. There is also another 28M in acquisition-related contingent consideration on the balance sheet. Combined this equals around 38% of assets. Back out debt and inventories and you have practically nothing left. Is this company's stock really worth $65? Where can it go from here? Has someone forgot his homework?
"This may be the case when a stock's chart looks appealing, but any type of fundamental analyses says you need to rethink the recommendation. CNQR is presently selling at 45 x 2012 cash flow. When do you anticipate they will actually report any GAAP earnings? You can buy Cerner (CERN) for about the same price!
"I have been a subscriber for many years to various Cabot publications. Usually you are right on with your advice. I hope you will rethink this particular recommendation and step up and let your readers know you may have made a mistake."
Senior Vice President, Investments (A really big bank)
The first correspondent has my apologies with regard to the numbers of GSA employees. When I wrote the original recommendation, I had no success finding a reliable source for any different number, so I used the three million found online. I have no confidence in that number, but it doesn't affect my analysis anyway.
Similarly, the price GSA pays for Concur's services doesn't bother me either. I trust that management has decided the improved volume will be worth it, even if margins shrink a bit.
What matters to me is the way the stock reacted to the news, and the way the stock is still acting today!
You see, I learned long ago that the stock market is smarter than me. It's also smarter than those two correspondents above and yes, smarter than you, too. Each and every one of us is wrong from time to time, but the market is never wrong. And the market is pushing CNQR up.
Because growing numbers of investors are having increasingly positive opinions about the company's prospects!
Some of these investors are discovering the company for the first time, while some have been following it for longer, and are impressed with its recent rapid growth--at 28% in the latest quarter, this growth is accelerating! In sum, the buyers are in control, overpowering sellers, and thus creating a long-term uptrend in the stock's price.
But what about the arguments of my second correspondent, who knows much more than me about the firm's metrics?
Reading them through, I'm impressed. If I were a novice investor, I'd say, "This guy knows what he's talking about. I'm not touching that stock with a ten-foot pole."
But I'm not a novice, and I say those numbers don't matter--because the stock tells me they don't matter.
Sure, those numbers matter if you're intent on finding undervalued stocks and holding long-term until they reach fair value.
But CNQR was recommended by Cabot Top Ten Trader, and subscribers to that publication don't want slow long-term growth. They want fast growth! They want stocks with a high probability of going up in the weeks ahead, and whether these stocks have strong or weak balance sheets and high or low valuations don't bother them.
In fact, these things don't bother a lot of investors, which is why great growth stocks are usually viewed as too expensive by fundamental analysts!
Whether it's Amazon.com, eBay, and Crox in their heydays or Ulta Salon, Michael Kors, Mellanox, Cirrus Logic today, it's not valuation that matters, it's growth potential and upside momentum that matter.
The caveat, of course, is that once momentum fades, it's important that you sell these stocks. Projections of growth and dreams of glory are all well and good as long as the stock is going up, but as I said, the market is always right, so when a growth stock turns down, my opinion of it turns down, too.
By the way, Cerner (CERN), recommended as an alternative by my second correspondent, looks good, too, but it's more mature than Concur and more widely respected, which means it has less upside potential and is more likely to be a slower grower.
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Another query--more timeless-- from a subscriber was this:
"Could you tell me if there are some differences between those terms you employ to comment on your recommendations such as weakness, decline, pullback, dip and correction. Is it the safest way to buy a stock making a new historical high?"
--G.S. Hollywood, Florida
"As to the terms used, all refer to price action. Some are synonymous; sometimes there is a distinction.
"Weakness is imprecise, but generally reflects performance over a longer time period, which is not bad, but is at least lacking vigor if not actually losing ground.
"Decline is simply loss of price over a period of time. It could be a day; it could be a decade.
"Pullback is a decline in the context of an uptrend over a longer time period. A pullback generally lasts a matter of days or a week or two.
"Dip is similar, though frequently over a shorter time period. And it is not necessarily in the context of an uptrend. There may be no obvious trend.
"Correction is similar to pullback, though usually over a longer time period, as long as 13 weeks in our book.
"As for stocks hitting new highs, growth-seeking investors very much like stocks that have the power and sponsorship that enables them to hit new highs. Growth investors like it best when they are able to buy these stocks at the end of a classic correction. Generally, the briefer the correction, the better--because the odds are greater that the uptrend is intact.
"However, a very long correction that builds a solid base can be a launching pad for a fine advance. 'The bigger the base, the bigger the move.' is a truism. Trouble is, sometimes the move is down, and the longer the base, the lower the odds that the uptrend remains intact.
"Hope that helps!"
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
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