The Cocktail Party Fund
When Bad Stocks Happen to Good People
BitAuto (BITA): Great Story, Numbers and Chart
One of my favorite mutual funds used to be an offering from a big Boston investment house that took the favorite picks of a large number of the company’s stock and bond fund managers and put them all into one fund.
Think of it! A large-cap manager’s favorite large-cap, a tech fund manager’s top technology pick, and so on. It seemed ideal.
The trouble was, the fund consistently underperformed both the broad market and the funds run by the various managers. It seemed that the manager’s success with their funds was more due to their portfolio construction and risk management than to their stock picking.
But performance wasn’t why I liked the fund. What I loved was its nickname, which was “The Cocktail Party Fund.”
It was called that because it was made up of the various managers’ favorite stock stories, the ones that they would talk about if someone asked them about a stock at a party.
At Cabot, I like stocks with good stories, too. I’ve always said that anyone who’s going to invest in a stock should be able to give a summary of why they were buying. (It’s the equivalent of the elevator pitch, which requires you to say—in the minute or so it takes an elevator to zip from floor to floor—why a company ought to hire you.)
I still believe that. If you don’t have real clarity about what makes a stock a good place to risk your money, you shouldn’t buy. (And “some guy on television likes it” doesn’t qualify.) And that real clear reason is often a good story.
But I want to talk just a bit about the danger or relying too heavily on story. Because a great story just isn’t enough; you also need solid fundamentals and a supportive chart.
When Bad Stocks Happen to Good People
If you need a great example of a bad investment based on a good story, just look at Mark Twain and the $300,000 he sunk into the Paige Compositor, a machine that was supposed to replace the human typesetter. The typesetter was a guy who stood in front of a set of pigeonholes containing lead type and picked out letters, spaces and punctuation, one piece at a time, and assembled them into text, line by line.
It was a job that was ripe for mechanization, but the Paige Compositor was a cranky and unreliable machine that never made it to market. Twain lost every bit of his $300,000 (nearly $6 million in today’s dollars) and took years to recover financially from the blow.
As a China and emerging markets guy, I used to love China Medical. The company had a nice, stable sales base of medical diagnostic kits that were cheap, simple and easy to read, perfect for small clinics in rural China.
But the company also had a high-intensity focused ultrasound (HIFU) machine that could destroy tumors inside the body by heating them. No incisions were required and there was no pain. It seemed like a fabulous technology to me (and other investors as well), and we kept waiting for the HIFU machine to get a clinical trial in the U.S. or Europe that would unlock the Western market.
A small trial ultimately got underway at a medical center in Washington state, but there was never a definitive result. China Medical ultimately sold the HIFU technology to another company and has been delisted from the major exchanges and now trades on pink sheets at pennies per share. Some stories just don’t have happy endings.
I still get questions about CMED from people who loved it and would gladly buy back in just to be able to tell the HIFU story … if the company still had it. It was a perfect cocktail party stock.
Great Story, Numbers and Chart: BitAuto (BITA)
I asked Tim Lutts, our fearless leader, what his cocktail party stock was and he replied: “BitAuto,” a company I’m very familiar with. So I thought it would be a good idea to write about it.
(Why am I featuring a story stock today when all the examples of story stocks I’ve given have been dismal failures? The answer is that Tim and Mike Cintolo and I, Cabot’s main growth stock writers, won’t even consider a stock with a good story unless it also has a supportive set of fundamentals and at least a good setup in its chart. It’s just a reflex. We’ve all been burned by pretty faces in the past, and our appreciation of a good story is always tempered by our respect for a sound foundation.)
BitAuto (BITA) is a Chinese company whose website helps China’s automobile buyers find information about cars and prices and give feed back about their experiences. It also lets dealerships set up virtual showrooms and communicate with potential customers. Probably the best U.S. equivalent is cars.com.
While China is a huge market for automobiles, it’s also a very fragmented market, with no national retail chains and few national brands. By bringing car buyers and sellers together, BitAuto is performing a valuable service and enjoying great results. The company experienced revenue growth of 40% in 2013 (and 47% in Q1 2014), with estimates of 2014 earnings up 50% (from $1.03 in 2013) to an estimated $1.55 in 2014.
BITA is also up from 32 at the beginning of the year to 45 in recent trading. But for purposes of this article, the numbers and the price appreciation aren’t relevant. The point is that BitAuto has a great story, one that Tim would enjoy telling at a party.
I’m assuming that Tim’s recent purchase of a Tesla automobile might nudge him toward telling the Tesla Motors story as well, but I won’t second-guess his choice.
In my next Cabot Wealth Advisory, I’ll fill you in on the stock that our growth guru, Mike Cintolo, gave to the same question.
For my stock pick today, I’m going to give you the write-up of BitAuto that I did for Cabot China & Emerging Markets Report. We owned the stock from September 2013 through March 2014 and made a good profit when we sold as the stock corrected sharply in March and April. BITA is now pushing back near its March highs, and I’m considering re-recommending it to my subscribers.
As with all of Cabot’s growth recommendations, BITA has a strong combination of Story, Numbers and Chart, which makes it a much better bet for investment than just a good story.
But I do love a good story.
"At the end of 2003, there were about 8.5 million passenger cars on China’s roads. Those were the days when photos of the morning commute featured mostly bicycles. At the end of 2012, that number had risen to 120 million, according to China’s Ministry of Public Security. The more than 15 million passenger cars delivered to new Chinese owners in 2012 outnumbered the total number of cars on the road in 1999.
"New car sales are expected to near 17 million in 2013, and sales of all vehicles will top 20 million. And if the estimates from China’s Ministry of Transport are right, by the year 2020, the number of passenger cars on Chinese roads will likely top 200 million. All in all, that’s not bad for a country that, until 1994, restricted auto ownership to government agencies and Party official. In 1985, there were reportedly only 60 people in Beijing with private, non-government cars.
"There are very limited opportunities for U.S. investors to participate directly in this automotive revolution. Stocks of the big Chinese manufacturers like Chery, Geely, BYD and Great Wall are only available on pink sheets.
"Fortunately, there’s BitAuto Holdings (BITA), a company that provides Internet content and marketing services for Chinese auto manufacturers and dealers. According to its 2012 annual report, BitAuto provides advertising services and digital market solutions to 60 of the 82 major automakers in China.
"BitAuto’s business is built on four core offerings:
• The BitAuto.com advertising service (about 80% of 2012 revenue) gives auto dealers a place to list pricing and promotional information on the Web, posts specs, reviews and feedback from consumers and sells advertising;
• The EP platform, developed in 2012, gives new car dealers a place to build virtual showrooms online and provides digital marketing and customer relationship management (CRM) applications;
• The taoche.com Website (about 2% of 2012 revenue) does the same thing for used cars;
• BitAuto’s digital marketing solutions business (about 18%) helps dealers build Websites, buff their images and plan and execute online marketing and advertising campaigns.
"The rapid growth of the Chinese automotive marketplace has been good for BitAuto. At the end of 2012, the company had sales and service representatives in 132 cities across China, with plans to continue expanding. Revenue grew 59% in 2010, 53% in 2011 and 61% in 2012. During those same years, earning grew from 26 cents per share in 2010 to 40 cents in 2011 and 58 cents in 2012. Estimates for 2013 earnings are for 91 cents per share.
"The company’s Q2 earnings report showed a strong 41% jump in revenue and a scorching 109% jump in earnings. The stock reacted with a big jump on huge volume.
"BITA came public in November 2010 at 12. After a few months, the stock began a torturous 15-month correction that pulled it down to a double bottom at 3.5 in January and June 2012. But once BITA got going, it showed real strength. From that low of 3.5, the stock has now hit the teens, spiking to 18 briefly after its great Q2 report. After that spike (which came on 1.75 million shares traded vs. its 166 million average), the stock has spent five weeks in a volatile consolidation. Support has appeared at 13/14 and resistance at 16/17. The stock has generally been following its 25-day moving average higher.
"BitAuto Holdings is still a young stock in terms of market acceptance. The company has huge potential, both from the growth of the Chinese automotive industry and from the increase in Internet penetration among Chinese consumers. While it’s no slam dunk, if BitAuto gains wide acceptance as a way for consumers to find cars and for manufacturers to find consumers, the sky’s the limit."
For more information on BITA and additional high-potential growth stocks I'm following in Cabot China & Emerging Markets Report, consider taking a trial subscription. Our market timing indicators are flashing "buy" and now IS the time to get on board. Click here for more details.
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory
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