Estimize | Dec 30, 2013 01:48AM ET
Before we get into the 2014 picks, below are the 2012 and 2013 picks with their associated review posts.
2013 review
To recap, we returned 20% in 2012 and over 80% in 2013, crushing the market both years, beta adjusted.
As a small caveat regarding my 10 stock picks for the year. Nowhere outside of these yearly posts would I ever pick a single stock under the assumption that you must hold it the entire year, that’s just insane. The only risk management involved in these picks is an understanding of the cyclical phase I believe the broader market is in, and broader secular trends within different industries. If I felt the market as a whole was going to suck in 2014, you would not see high beta names on this list. While I think it’s a flawed exercise to judge the portfolio as a whole at the end of the year given the extremely arbitrary 10 stocks and 1 year holding period, if you really want to do that, the returns should be measured beta adjusted against the S&P 500 as a relative return strategy.
While it’s relatively self evident what my strategy is given the picks on this list, just to be clear, I am a momentum trader. I look for high growth names that have the opportunity to return at least 50% each year. This means that while I think XOM is a strong pick this year, it an’t going up 50%, hence it’s not making the list. Some of the attributes that I look for include: accelerating revenue growth, early stage companies that are about to start growing EPS after just focusing on revenues, strong technical patters and relative strength, new innovative products, large secular trends in their industry, and stocks that are not yet owned by a ton of institutions but have the ability to become cult stocks in the coming year. At the end of the day it’s all just numbers and letters, the only thing that matters to price is whether more people want to own the stock now than they did yesterday.
I also want to briefly thank my intern Alex Zhong for his help on the research side for this year’s picks. Alex is currently a sophomore at NYU and has a bright future ahead of him. Just please don’t let him become an investment banker, someone please hire him for an analyst position at a fund so that his work ethic, extremely polite attitude, and talent do not go to waste.
So here are your top trends and picks for 2014:
Because most people don’t actually know what Bitcoin US Dollar, (BTC/USD) is at a fundamental level, how it actually works, they miss the true innovation of the protocol itself. 2014 is going to be all about the Bitcoin protocol as a means for verifying everything via the blockchain. Yes, the price of Bitcoin will most likely surge as well, my guess is as good as anyone else’s as to how high, but I would not be surprised to see $10,000 by the end of 2014. Look for dozens of startups which use the Bitcoin protocol to be funded by VCs and for many of them to succeed in beginning to replace older institutions. The other day I saw a startup which is trying to build a new way of voting online by verifying with the blockchain, it’s genius. This protocol will revolutionize so many things, and this is the year that you will see and hear all about it. Use the private market valuation of Coinbase as your privately tradable asset.
It took a while for International Business Machines, (IBM) to get its act together, because it’s IBM and it operates on a completely different timeframe than anyone else. The company which is headquartered literally down the block from where I grew up in Chappaqua, NY, made huge strides this year in commercializing their Watson analytics engine. But the real promise of Watson is not what they can do with it, it is what everyone else can do with it. Finally towards the end of the year IBM opened the Watson API to third party developers, in a limited way. This sets the ground for 2014 to be the year in which developers get their hands on the amazing Watson engine and build a host of amazing apps with their intelligence layer. Don’t sleep on how important this advance is, and how long it took for IBM to get this into everyone’s hands. Will the market give IBM the credit it deserves this year in terms of a rising multiple, maybe, maybe not, that’s a tough one to call, but if a few apps built with Watson get out there and become popular which I think they will, yes you will see IBM’s stock benefit.
The food service industry will be reshaped head to toe in 2014. It’s been many years in the making, with fits and starts, but it feels as if 2014 will be the year when it really happens. We already have Seamless, Grubhub, Yelp Inc, (YELP), and OpenTable Inc, (OPEN), but we’re about to see the next big wave which is going to connect everything. You’re going to see a wave of iPads hit restaurant tables and replace waiters, variable pricing models for high traffic restaurants, people cooking meals in their homes for each other, chefs that will cook meals in your home for your party on demand, and much easier ways to buy fresh produce and meat. There is so much waste in our food system right now that will be taken out with better logistics, collaborative consumption, and verticalized remnant labor apps. This is the year. Use the private market valuation of Blue Apron as your privately tradable asset.
And now for the 10 stock picks…
HomeAway (AWAY) – Rising EPS and Revenue estimates, check. History of beating expectations, check. Accelerating revenue growth and the ability to turn on the EPS spigot, check. Great chart that is set to take out the IPO highs and increasing institutional involvement in the stock, check. But the real reason I’m picking AWAY this year is due to the incredible momentum shown by Airbnb and my belief that they will be coming public sometime towards the end of 2014 at greater than $10B valuation. One great strategy that I’ve employed many times is to buy the publicly traded company that is in the same industry as the even better private company that will soon IPO. Why? Because investors use the public company as a proxy, and the IPO of the better company naturally draws attention and capital to the public one. The major secular trend here is in collaborative consumption and it is huge. I like Airbnb 1,000,000 times more than AWAY as a trade, but AWAY should continue to put up great numbers and see great returns in 2014.
China is making a monumental mistake in encouraging the growth of its domestic auto market. They had the opportunity to build cities from scratch that didn’t rely on fossil fuels for transportation. While central planning does cut through red tape and allow for the quick implementation of economic strategy, it also opens you up to huge errors. Bitauto is one huge way to take advantage of this error. The company provides a web site that allows Chinese to get transparency on auto pricing. This is a huge theme of mine, where there is the opportunity for more pricing transparency it will take place eventually. The Chinese are buying autos hand over fist and this site will be widely used.
The company had its IPO in 2010 and hasn’t fared well since as all things China, especially on the internet have been thrown out with the bathwater. This one has a real business behind it and has been growing revenue consistently at around 60% YOY for the last 8 quarters and is well profitable now. At a $300M market cap and trading 16X earnings it’s not richly priced. (still not richly priced after last year).
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