If you’ve missed my Live broadcasts on Marin Software (MRIN), be sure to check them out before sending questions my way. Most of the most common questions have been answered (often more than once) in the videos.
You can see the first one here (MRIN is discussed at the 28 minute mark), the next one here (MRIN is discussed at the 15 minute mark). Finally, I did an in-depth Q&A session on MRIN (at the 33-minute mark) during last week’s Live broadcast.
As always, be sure to read my disclosures / disclaimers below. Cheers!
Here are a couple of quick / easy lessons to help polish your game…
Lesson #1 — Risk/Reward Beats Charts and Catalyst Chasing
One of my readers asked if I had any updates on Pixelworks (PXLW), an old pick of mine. Back in 2013, I launched coverage on PXLW, due to the expectation that 4K TVs would take off during the 2014 holiday season (which would start about 18-months later).
The stock was cheap relative to their patents and R&D spending, so I viewed the risk as low (maybe 50% of potential downside). Simultaneously, if 4K took off, the reward could be high (a potential 10-bagger).*
* FYI, those calculations were based on a deep industry/company evaluation, coupled with the proper math that my mentors (successful Wall Street equity analysts) had taught me to do.
That made it a great 18-month bet.
For many investors, that’s about 17 1/2 months too long (LOL), but that’s how the big money really gets made on Wall Street. Over time. Not in quick little bites.
A little over a year later, PXLW had risen from 2-something to nearly $10. The excitement around 4K TVs was reaching a fever pitch. However, having followed the company for over a year, I had a good feel for the progress… and I didn’t like it relative to the new risk/reward equation.
Yes, 4K could still take off and send PXLW to $20, but if it didn’t, it could fall back to $2.
That’s called a coin flip.
Coin flips are o.k. if you stand to make more for winning vs. losing (or if the coin is more likely to land on heads than tails, for some reason).
In this case, the latest research on 4K technology told me that there wasn’t enough 4K content being created to drive as much demand for new TVs as I was hoping to see. So, with the stock not paying us enough for the risk, I told everyone that I was exiting the position.
As it turns out, 4K did not take off (and now, 6 years later, it still hasn’t!). The stock eventually dropped to $1. I didn’t get involved at those levels, but could see why someone would — the patents and R&D spending was still there, so the risk/reward was attractive again — maybe 50% of downside vs. 5x of upside.
Over the next couple years, the stock rose to $7. It has since pulled back to $3, but the lesson is clear. By focusing on risk/reward, your thesis can fail to play out and still give ample (and multiple) opportunities to cash out with a win.
Because of this, as long as my thesis doesn’t die, I tend to stay patient. When I don’t, I often regret it later. However, when the story does appear dead (like 4K TVs clearly not taking off during the holidays a few years ago), it’s usually best to reallocate the $$$ to a better opportunity.
But as we’ve seen with stocks like GLUU, PXLW, ATTU, and even HIMX in late-2017, patience pays, as long as you have risk/reward on your side. Bascically, if you wait long enough, some catalyst (old or new) can make the wait worthwhile.
This is all enabled by getting in at an attractive risk/reward price…
…NOT looking for a catalyst or chart pattern. There are many reasons for this (a lesson for another day).
Regardless of the company’s news flow, upcoming catalysts, etc., simply getting in at the right level with faith in the thesis (story), gives you many ways to win (execution, M&A, pure luck)… and not too many ways to lose (because even a failed story often leads to M&A, when the stock is cheap enough).
Remember, just the cost of being public will knock $1-2M from the cost structure for an acquirer. That alone is worth $10-20M of market cap!
Apply that notion to a company like MRIN (which has a few suitors that would like to buy them) and you can see that we’re effectively buying the stock for free. So, why should I care what the chart says or what the next catalyst will be? One way or the other, something is likely to break in the stock’s favor.
I don’t care if it’s big and tomorrow or small and months from now.
I only care about making enough profit to beat the market… and this method has enabled me to do that year after year, with very few exceptions dating back to 1996.
Lesson #2 — Everyone Is Stupid!
Another investor only recently read through the HEAR transcript from their Q4 earnings call a year ago. According to the investor, management “gave a heads up on sales boom” that was soon to come and gave “multiple other data (points)… in the ensuing months”.
“The stock did not move at all. STAYED at $2 for many months until results actually hit the bottom line. Anyone listening to the calls could have made a mint. Reminds me of where MRIN and SMSI is now… the real catalyst even before Fortnite was licensing of Hypersound back in October 2017 which reduced expenses by $10M a year and flipped the company to EBITDA profitability even at just $150M revenue. That was a pound the table buy then if you knew the story: 2014-2016 was down all because of burning cash into Hypersound research.”
I responded (paraphased):
I know. That’s reminiscent of MRIN’s deal with GOOG flipping them toward cash flow positive. More times than not, small companies become worth a lot more before individual investors realize it (and, as a result, long before the stock price reflects it).
That’s how I do what I do. It’s not hard. It just requires patience and an understanding that the stock isn’t moving because not-enough people have figured it out yet.
I tip investors off when I find opportunities like that, but unless they really know in their hearts what’s going on, they get scared (or get shaken out by someone crying “pump”) and bail out before the big payday even has a chance to come.
That’s the problem with day trading. Traders never learn how to identify winners. If they did, they’d become much more dangerous traders!
In short, this dynamic is made possible by the fact that 1) most professional-level investors don’t deal in small companies and 2) most investors who deal with small companies don’t do professional research.
So, when someone asks why one of my picks hasn’t taken off yet, I say, “because everyone is stupid!”
Of course, that’s hyperbole. However, it’s a fact that if a risk/reward opportunity arises, the gap won’t close unless/until enough people catch on to it. Even with the amounts of money I deal with, I avoid owning more than 4.99% of any company in which I invest (the legal limit before encountering reporting requirements), which won’t put a big dent in most stocks.
In other words, skepticism or a stock that isn’t moving is NOT necessarily a sign that things aren’t playing out properly. In fact, it’s more likely that people simply haven’t figured out what the stock should actually be worth to properly reflect its risk/reward.
So, now you know…
- My Top Picks For 2019 (with link to MRIN video)
- My YouTube Channel
- Individual Stocks Showing Life
- The Quick Investor’s Guide To SMSI
- MoviePass Projected To Burn $600M In 2018
- Sprint Finally Rolling Out SMSI’s Safe & Found Nationwide!
- Lose 33% In 9 Months To Make 1,000% In 15?
- GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
- Buying SMSI — Today Is The Day I’ve Been Waiting For!
- Mark Gomes Research
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Disclosures / Disclaimers: I am long MRIN and SMSI. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.