The good, the bad, and the Twitter: some ideas for 2017

Although we are proponents of passive investing at Hardcastle Research, it's important to diversify your holdings. Single stocks can provide some diversification and offer substantial potential for returns. Here are some ideas that may be worth looking into for a small portion of your portfolio in 2017:

American Express (AXP)

When the decision is made to purchase a stock, it’s important to analyze both the technical movements of the stock price and the fundamentals of the underlying business. But there’s also a more qualitative, pragmatic element to investing in single stocks: the experience everyday customers have with the business itself. And this includes the experience you have with the business. A positive experience usually drives unwavering loyalty, and loyalty results in increased revenue.

Interacting with the customer service team at American Express (AXP) will undoubtedly leave you in awe. And not in a bad way, like many companies these days tend to do. It’s no surprise, then, that the stock is up about 20% over the past quarter, even as it trades at a forward price-to-earnings multiple of 6.8 less than the industry average of 19.5. So, with a 12.7 PE ratio, you’ll be buying AXP at an exceptional value.

“Don’t leave home without it” is their enduring slogan. We would add that you shouldn’t leave home without looking into both a credit card account and an analysis of what could be a good year for AXP.

Align Technology, Inc (ALGN)

After a one-year increase of 49%, right now may not be the best time to buy shares of Align Technology, but the demand for their product is certainly palpable. Align Technology, ticker ALGN, is the market leader in clear aligner orthodontics; an excellent alternative to braces for those who need just minor adjustments to their smile.

Align Technology designs, manufactures, and markets the Invisalign system for dental patients ranging in age from young teenagers to elderly adults. The stock is trading near its 52-week highs, but with demand surging for its product, this might be one company you should keep on your watchlist. If you’re looking for the stock to pull back a bit to offer a buying opportunity, that may not be a bad idea, but remember, there’s no guarantee the stock price will offer that opportunity any time soon. After all, the stock has returned 332% over the past five years, making it a good risk-adjusted investment, even when compared to the S&P 500 over that same time period.

Intuit, Inc. (INTU)

Intuit (INTU) is well positioned to grow over the next 5 years, especially as the on-demand economy of freelancers expands year after year. By 2020, the workforce of these independent workers is expected to reach 43% of the labor force; a substantial increase from just 6% back in 1989.

Intuit makes great products, but they also have outstanding customer service and they’re relentless in their pursuit to better their product offerings. For anyone looking to simplify their financial matters or improve the efficiency of their business, Intuit has a product that can make this goal possible. Long-term investors who bought the stock five years ago have seen returns in excess of 120%; not bad when compared to the 78% return of the S&P 500 over the same period. Of course, there’s much more risk involved with owning a single stock as compared to an index fund, but the rewards for owning INTU over the past five years have materialized.

GoPro (GPRO)

GoPro (GPRO) has had nothing but trouble over the past year. In November, the camera company announced plans to lay off 15% of its staff and shut down its entertainment unit, which was attempting to monetize the videos that had been shot on their cameras. Moreover, when the CEO was the highest paid in America in 2014, and yet the company is losing substantial amounts of money, you know it’s time to allocate your capital elsewhere. Analysts predict the losses to continue in 2017.

Company executives have cited production issues of the new Hero5 Black, which they expected to be among their best-selling products. Add to this the lack of availability for the company’s Hero4 cameras—all happening around the holiday season—and it’s no wonder the stock has gone from a 52-week high of $18.20 to a mere $9 as of this week.

GoPro is the Fitbit (FIT) of the action camera industry: they essentially offer one product (or a variation thereof), and the company has difficulty competing against companies that offer cameras—or fitness trackers, in the case of Fitbit—as just one of many products in their portfolio. Fitbit has also seen its stock plummet over the past couple years, and probably for good reason as investors are steering clear of one-trick-pony stocks such as GoPro and the like.

Twitter (TWTR)

Twitter (TWTR) has had no love from investors over the past year. And although the stock is up single digits from the beginning of the year, the company still has some work to do in order to get to its 52-week highs and beyond. However, even with all the negative sentiment and organizational shakeups, we still believe that Twitter is undervalued and worth investors’ attention.

Twitter is a media platform, despite what many social media experts would like it to be. It’s not merely a “microblog” or a place to just “tweet” your thoughts for the fun of it, although many certainly do utilize it in this way. But in actuality, Twitter has become a place where the day’s events unfold in real time. It has become a platform where campaigns for political office are effectively managed (and won). And it’s a powerful tool for marketing your business, your career, or even publicizing very public attacks, albeit much to the chagrin of Twitter’s largest shareholders.

CEO Jack Dorsey has acknowledged the power of Twitter as a news outlet and has said that the company is “focused on building the most useful, open, and comprehensive news network on the planet.”1 And although the executive team is trying to reign in some of the more destructive behavior users exhibit on the platform, they’d probably do more good for the media giant by allowing its netizens to freely express their First Amendment rights.

The social media site may indeed be sold to a larger, more profitable company, but it’ll still be a part of American culture for years to come, despite who has majority control of the company. The ubiquitous hashtag seen on nearly every television channel and even on highway billboards is not going anywhere, anytime soon.

The bears

There are, however, many analysts who would vehemently disagree with our bullishness on TWTR. Trip Chowdhry of Global Equities Research, has put a price target of less than $10 on the stock, and has claimed the company is “toast.”2 The stock was trading as high as $70 per share just three years ago, but is now in the $17 range. But the decline in stock price is just one of many problems the company faces.

With unusually high turnover in the C-suite, coupled with the fact that it’s been said that many of Twitter’s users are either not active or are outright fake, Chowdhry might have a valid case for downgrading the stock. He has cited “bad data” as a major reason he’s bearish on the stock, effectively making the case that if there are fake users that the company does not know about, then data quality is subpar, and if that’s true, then advertisers will look elsewhere instead of paying Twitter to market to phantom users. That's a lot of “ifs,” but it’s nonetheless an important point because advertisers need to be catered to if Twitter is going to remain a viable business. After all, they keep the lights on at HQ.

The contrarian play

Advertising revenue does have room to grow as well. When compared to Google’s $89 billion and Facebook’s $27 billion in ad revenue, Twitter’s $2.5 billion has the potential to increase over the next few years.1 Many critics of the company have raised concerns that management has done a poor job of making the experience user-friendly and attracting new users via a concentrated effort to market the platform to certain groups that could benefit from its features, such as local publications, small businesses, and freelance journalists. Twitter’s executive team is currently addressing these issues and they’re looking to improve the site’s look and feel.

It’s not all doom and gloom for the company, however, especially with sales up 8% from last quarter and a three-year EPS growth rate of 262%. And of the management that has stayed on, they still own a healthy 11% of the company, placing their confidence in the future of Twitter with their own capital.3 Investors should be jumping ship at precisely the same time as management; if management has their own skin in the game, that’s a good sign for outside investors.

We like Twitter as a long-term, buy-and-hold play, especially at these price levels. Contrarian investing may not be for everyone, but there is a case to be made for owning those stocks that have fallen this far out of favor, especially when the underlying value is as apparent as Twitter’s.

1.http://www.fool.com/investing/2016/11/07/read-this-before-selling-twitter-stock.aspx

2. http://www.cnbc.com/2016/12/21/twitter-is-toast-and-the-stock-is-not-even-worth-10-analyst.html

3. http://research.investors.com/stock-quotes/nyse-twitter-inc-twtr.htm