In Part Two of our interview, Kier McDonough of Brigos Capital Management discusses five companies with strong businesses that are in growth mode. He explains his method of screening for great performers, and then investing during a market uptrend.
Kate Stalter: Kier, with all the stocks you’re talking about here, you are not necessarily saying go buy these right now. When a lot of people talk about stocks, that’s what they’re saying. Talk about some of your caveats when you mention a watch-list name.
Kier McDonough: Sure, these are not recommendations. I’ll start with that, but these are stocks that I have on my watch list right now, saying I’m waiting for the market to confirm that it’s in an uptrend.
I’m a trend follower, and right now we don’t have a clear-cut trend. What I’ve noticed is that leading stocks—stocks with the best fundamental stories, the best new products, the best services—these are the ones that tend to outperform the market when you get into a good trading environment. And oftentimes these stocks will go up two, three, five times what the general market will do.
That’s why I concentrate on these, because they can really outperform. Think of it like sailing: You say it’s easier to sail or you go fastest when the wind is at your back, and that’s what I’m looking for. I’m looking for the general market to be in a solid uptrend and the leading stocks are the ones that outperform the most, and that’s where I’m concentrating.
Kate Stalter: Let’s look at a few other leading stocks from some other sectors. How about tech? Anything in that area that you like right now?
Kier McDonough: Sure, sure, there are a few names I like there. I think the social media area is relatively new. There’s two big names in that space that I like: LinkedIn (LNKD) and Facebook (FB). Both are very disruptive companies and they are leaders in their respective space.
LinkedIn...I’ll start with that one. They have a pretty easy growth story to understand. It’s basically Facebook with a suit and tie. It’s basically hiring services, advertising, premium subscriptions. They’ve had triple-digit revenue growth and very, very strong earnings growth. They’re really changing the way people post and update their resumes. It’s also more important as the way that people look for new hires.
Kate Stalter: That’s one where a number of analysts and even people in the general public have been able to understand how that company makes its money, which is not always the case with some of these social media companies.
Kier McDonough: Well, the good news is they are making money, and the part about this is it’s very disruptive. Before, people used to use Monster.com (MWW), and they’re basically putting themselves up for sale because LinkedIn has come in and really changed the dynamic.
People pay subscription prices to get access to the database, and that’s where they make their money. They’re expanding into other areas or expanding into other countries. So as the economy hopefully improves, there’s more hiring that goes on, these guys are right there at the forefront.
Kate Stalter: Talk about Facebook. That’s everybody’s favorite whipping boy right now, and it sounds like you’re saying that could be an opportunity people are overlooking.
Kier McDonough: Indeed. What I look at is, any company that has 900 million users worldwide is doing something right. If they’re able to monetize this—and I think they have some pretty smart people over there—if they’re able to monetize their business...and think of all the information they already have about their subscribers and being able to tailor information to marketers.
My personal feeling is there’s a lot of upside on this. What I do is a lot of precedent analysis. I’ll look at companies that were revolutionary when they came public, and I’ll look at their charts and how they traded.
To give you an example, eBay (EBAY), I’m using as a precedent here for Facebook. They came public back in 1996. The market was having a difficult time. After eBay went public, it corrected 50%. Once the general market began to move higher, eBay broke out and went on a powerful move.
Right here we saw [Facebook]...it was everybody’s favorite stock to hate, no question about it. The stock corrected about 43%. It’s starting to round up in a base at this point, kind of a U-turn type base, and I’m keeping an eye on it. Again, if it gets its legs underneath it, I think institutions will gravitate towards this thing. Because if you look at the earnings growth over the last three years, it was triple digits.