How to Identify and Invest in the Hot Stocks of Tomorrow

I bought this book at Borders, Queensbay Mall Penang for RM52.95. I wonder why there are so many books’ cover design or title use either “Starbucks” or coffee?

Take a look yourself:

This is a review of the book that grab my attention for the past few weeks – Finding the Next Starbucks by Michael Moe.

About the author

Michael Moe,CFA, is the cofounder, chairmanm and CEO of ThinkEquity Partners L.L.C, and was formerly director of global growth stock research at Merrill Lynch. He has been named to Institutional Investor’s All American research team and has been awarded “Best on the Street” by the Wall Street journal.

Visit his company’s blog: Think Equity.

Overview

I bought this book because of the subtitle: How to Identify and Invest in the Hot Stocks of Tomorrow.

I finished reading it because of the thought-provoking contents. The writing style is straight to the point and without long and winding elaboration. A good point is made within a few paragraphs. Unlike some thick book which take 30-50 pages just to convey a small message.

Michael shares information and methods he obtained through years of experience unselfishly in this 374 pages book. He shows us the gold mine of stock investing. The big money is in growth investing.

Every chapter in the book end with interview transcriptions of the most remarkable personnels in the growth market. I learnt a lot of tricks and insight from the interviews.

Content

1. Star Search – Finding the Supernovas
The stocks that generate the most spectacular returns are small companies that become big companies (very big companies like Google and Starbucks). The main point here is that in the long run, a company’s share price will be nearly 100% correlated with its earnings growth.This tag line is emphasized many times throughout the book.

Growth stocks lie within Microcap Stocks (market capitalization $50-250 million) and Nanocap Stocks (below $50 million). The author proves his finding with historical data supports that looks convincing. For example, value of $1 invested in Yahoo! during IPO in 1996 is worth $72 today.

2. The Power of Growth – The Magic of Compound Interest
This chapter covers brief introduction of the rule of 72. A marvelous example is quoted: One cent doubling every day or $10,000 per week? That’s the power of compound interest.

3. High Earnings per Share = High Internal Rate of Return (the Argument)
A fun and true quotes is “Don’t drive on the highway looking through the rearview mirror.” Past history wont’ do much help, but it does provide some patterns that worth examining.

One of the point resonate with many other investment gurus – diversification increases the risk of mediocre performance.

The stars of tomorrow generally are microcap in size, have a relatively high P/E, and have high earning growth over a sustained period.

4. Formula for Identifying and Evaluating the Stars of Tomorrow (the Process)
In this chapter, Michael tells us how he and his investing team identify which unnoticed company to invest in. There are 10 Commandments embedded in ThinkEquity’s investment process.

5. Megatrends
Megatrends play a key role to determine the growth theme of tomorrow. Several megatrends discussed here is the knowledge economy, globalization, the Internet, demographics, convergence, consolidation, brands and outsourcing.

6. The Four Ps
The four Ps are People, Product, Potential and Predictability. After indentifying the industries driven by key megatrends, Michael use the four Ps to further differentiate the stars of tomorrow from the ordinary companies. Price and profits aren’t part of the four Ps not because they don’t matter. But many of the huge winners looked expensive on a P/E basis or were losing money when they started.

7. Valuation Methodology
Enough with the philosophy, this section onward discuss about the methodology. The first is using the P/E to growth (P/E/G) to value growth companies. Michael also gives away a P/E-to-growth matrix he used in ThinkEquity. Read this chapter for other technics. He also discusses about the six variables that affect the short term stock price movement – the six Is (inflation, interest rates, indices, investor sentiment, inflows to equity funds, and IPO pricing)

8. Sources and Resources – Finding Ideas
Here you will find a list of what Michael constantly read and dig, including newspapers and magazines he never misses, blogs he subscribes, and the VCs he follows. I subscribed to all the blogs he listed in the book, using RSS reader and tag them “ThinkEquity”. If Michael is using Google Reader, I hope that he shares the post that he think is remarkable and if we are included in his Gmail contact, we will be able to catch up with what he is up to.

9. Think Tomorrow, Today – Hot Areas for Future Growth
Michael shares his knowledge about what’s hot now, and possibly will be hot in the future such as Web 2.0, Online Advertising (which makes Google so rich!), open source, on demand software service, just-for-me media, cellphone future, biotech, digital doctor, education in knowledge economy, the power of women, premium brands, minority to majority, safe and secure, alternative energy and nanotechnology. In fact, I just grabbed a book about nanotechnology from the bookstore last weekend.

10. Case Studies
Last but not least, the author shows examples and direct comparison of the companies existing now as case studies. I appreciate the analysis of Best Buy vs Circuit City, Intel vs. AMD, Dell vs. Gateway, Starbucks vs. Krispy Kreme, eBay vs. Sotheby’s and Genentech vs. Pfizer.

Buy or Ignore?

BUY! A MUST BUY! I like it and I think you will like it too. Buy it now!

Stock 101 Quiz

Stock 101 Quiz