LinkedIn: Back on Track

08/27/2014 8:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This company—the latest addition to our model portfolio—is revolutionizing the recruiting industry and building a social network for professionals, asserts Mike Cintolo, editor of Cabot Market Letter.

We made good money in LinkedIn (LNKD) last year, and it’s one of those stocks we’ve followed closely even after we sold last fall, believing that the longer-term story will eventually re-assert itself.

That time has now come after a great second-quarter earnings report; shares have come alive as big investors rebuild positions. Shares are extended to the upside, so a looser leash is necessary, but after an eight-month, 47% wipeout, we’re not anticipating a ton of selling pressure if the market remains in good shape.

We were super-bullish on LinkedIn when we bought the stock back in 2012; its business was revolutionizing the recruiting world, and it was also creating a professional social network (and all the advertising opportunities that go along with that).

And the stock did do well for us after it blasted off in February 2013…but the advance ended after management began spending heavily, cutting into earnings growth.

That spending spree—mainly to switch to a sponsored advertising model, like Facebook (FB), but also to enhance various other tools—took about a year, but it’s now bearing fruit.

In the second quarter, all three of the firm’s business segments (recruiting, advertising, and premium subscriptions) rose at least 44%, while earnings were up 34% and cash flow soared 69%.

Analysts believe the earnings slowdown is a thing of the past; the bottom line is projected to rise 47% in 2015 and north of 40% in the years that follow.

Most important, institutional investors are beginning to buy into the re-acceleration story. LNKD fell 47% over eight months, but found support in the $150 range and, a month ago, gapped higher on earnings and has been running since. It still has lots of old resistance to chew through, but we think it’s turned the corner. Buy.

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