Saturday, June 21, 2008

Screaming Buys with Hidden Gems

First, a clarification. Because I called these ‘screaming buys’, doesn’t mean that I recommend these stocks, as I never make recommendations, but as strong suggestions for further research.

Second, let’s get the disclosures out of the way. I don’t want to make the mistake I made last year on March 8, 2007, when I wrote the article ‘Why Stock could be Up Substantially by Year End’. The article listed twelve reasons why (AMZN) looked extremely favorable. The stock started shooting up in April and within three months, the stock had doubled. That’s great for the investors who bought it, but not for me, since I didn’t own any of their shares. So I want to let you know that I own the first three of following stocks.

One of the things that all the following stocks have in common is that they have what I call a ‘hidden gem’, which is a division, business, or product which may be overlooked.

At the top of the list is, yes again, (AMZN). The hidden gem? The Kindle! The Kindle is the electronic book reading device that Amazon released in November 2007 and sold out in five and a half hours. It now provides 6 percent of the company’s unit sales of books in both paper and electronic formats. I think the growth of sales of both the Kindle and the e-books that can be read on them is in its infancy.

Imagine if you are going on a cruise and you want to bring four or five books with you. Why bring a bunch of heavy books when you can quickly download them and bring them all on a Kindle. Have trouble reading the small print on a paperback? Just download the book on a Kindle, adjust the font size and the background. I’ve had the Kindle recommended to me by senior citizens, which is a big market for the Kindles. What other electronic products have been recommended to you by senior citizens?

Amazon also has another hidden gem,, also known as Internet Movie Database. IMDb has an incredibly high number of viewers and very high search engine result placements. Type in just about any actor or actress in Yahoo or Google, and an IMBb reference will show up in first five listings. Amazon has a PE of 68 and a PEG of 2.5.

Another screamer is eBay (EBAY), and the hidden gem is Paypal. Paypal has over 164 million accounts and is growing faster than the eBay Marketplace business. Net revenues from Paypal grew by 32% for the latest quarter versus the same quarter last year, almost double the growth of the ‘eBay’ business. eBay has a PE of 89 and a PEG of 1.0. The company is debt free.

Apple (AAPL) has an unusual hidden gem, $ 9 billion in cash, plus $10.4 billion in short term investments, so in essence, $19.4 billion in cash. When you consider that the company has no debt, that makes the cash a stronger gem. Everyone seems to talk about the iPhones and iPods; did everyone forget that Apple makes computers? Does anyone know that sales of their desktops for their latest quarter grew by 48% over the same quarter last year, and laptops by 58%? The company is on a roll. The stock has a PE of 36 and a PEG of 1.46.

Google (GOOG) is another stock with a hidden gem: YouTube, which get over a billion views a day. The number of unique viewers for YouTube is growing faster than Google. In April, 11 billion videos were viewed online with 37.9 % viewed on Google/YouTube, grossly outperforming the second highest, Fox Interactive Media, with only 5.1%. Once YouTube starts to really monetize, the revenues should take off. Google has a PE of 38 and a PEG of 0.99.

Now for a stock that is non-tech related. The hidden gem of Sears Holdings Corporation (SHLD) is the clothing business, Land’s End, which I wrote about extensively a year ago. Edward Lampert, the Chairman of Sears, has consistently mentioned the profitability of Land’s End in his letters to investors for the last couple years. Most recently, he reported that Land’s End increased its revenues by 12%, and said it was one of three major successes for 2007.

I still think that Land’s End should be spun off. Sears holdings continues to pay down debt, increase share repurchasing, and generated $1.6 billion of operating cash flow in 2007. The stock has a PE of 19 and a PEG of 2.98. The stock, which sold for over $190 a share last year, is currently selling for less than $75 a share.

Author owns AMZN, EBAY, and AAPL.

By Fred Fuld at

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