Six Attractive Stocks with Hidden Gems

I don’t want to make the mistake I made last year on March 8, 2007, when I wrote the article ‘Why Amazon.com Stock could be Up Substantially by Year End’. The article listed twelve reasons why Amazon.com (AMZN) looked extremely favorable. The stock started shooting up in April and within three months, the stock had doubled. That’s great for the investors who bought it, but not for me, since I didn’t own any of their shares. So I want to let you know that I own the first three of following stocks I am writing about in this post.

One of the things that all the following stocks have in common is that they have what I call a ‘hidden gem,’ which is a division, business, or product which may be overlooked. However, because I called these ‘screaming buys,’ does not mean that I recommend these stocks, as I never make recommendations, but as strong suggestions for further research.

At the top of the list is, yes again, Amazon.com (AMZN). The hidden gem? The Kindle! The Kindle is the electronic book reading device that Amazon released in November 2007 and sold out in five and a half hours. It now provides six percent of the company’s unit sales of books in both paper and electronic formats. I think the growth of sales of both the Kindle and the e-books that can be read on them is in its infancy.

Imagine if you are going on a cruise and you want to bring four or five books with you. Why bring a bunch of heavy books when you can quickly download them and bring them all on a Kindle. Have trouble reading the small print on a paperback? Just download the book on a Kindle, adjust the font size and the background. I’ve had the Kindle recommended to me by senior citizens, which is a big market for the Kindles. What other electronic products have been recommended to you by senior citizens?

Amazon also has another hidden gem, imdb.com, also known as Internet Movie Database. IMDb has an incredibly high number of viewers and very high search engine result placements. Type in just about any actor or actress in Yahoo or Google, and an IMBb reference will show up in first five listings. Amazon has a P/E of 68 and a PEG of 2.5.

Another screamer is eBay (EBAY), and the hidden gem is Paypal. Paypal has over 164 million accounts and is growing faster than the eBay Marketplace business. Net revenues from Paypal grew by 32% for the latest quarter versus the same quarter last year, almost double the growth of the ‘eBay’ business. eBay has a PE of 89 and a PEG of 1.0. The company is debt free.

Apple (AAPL) has an unusual hidden gem - $ 9 billion in cash, plus $10.4 billion in short term investments, which in essence gives it $19.4 billion in cash. When you consider the fact that the company has no debt, the cash becomes an even stronger gem. Everyone seems to talk about the iPhones and iPods - did everyone forget that Apple makes computers? Does anyone know that sales of its desktops for its latest quarter grew by 48% over the same quarter last year, and laptops by 58%? The company is on a roll. The stock has a P/E of 36 and a PEG of 1.46.

Google (GOOG) is another stock with a hidden gem: YouTube, which gets over a billion views a day. The number of unique viewers for YouTube is growing faster than Google. In April, 11 billion videos were viewed online with 37.9 % viewed on Google/YouTube, grossly outperforming the second highest, Fox Interactive Media, with only 5.1%. Once YouTube starts to really monetize, the revenues should take off. Google has a P/E of 38 and a PEG of 0.99.

Now for a stock that is non-tech related. The hidden gem of Sears Holdings Corporation (SHLD) is the clothing business, Land’s End, which I wrote about extensively a year ago. Edward Lampert, the Chairman of Sears, has consistently mentioned the profitability of Land’s End in his letters to investors for the last couple years. Most recently, he reported that Land’s End increased its revenues by 12%, and said it was one of three major successes for 2007. However, I still think that Land’s End should be spun off.

Sears holdings continues to pay down debt, increase share repurchasing, and generated $1.6 billion of operating cash flow in 2007. The stock has a P/E of 19 and a PEG of 2.98. The stock, which sold for over $190 a share last year, is currently selling for less than $75 a share.

Safeway Inc. (SWY) is the third largest supermarket chain in North America and the the tenth-largest retailer in the United States, with over 1750 stores. Last month, the company increased its dividend and raised the stock repurchase program by $1 billion to a total of $5 billion.

The company's hidden gem is Blackhawk Network Holdings, the subsidiary that provides third-party gift cards, prepaid cards, telecom cards and entertainment cards, in their own stores and to other retailers. If you have ever walked into a Safeway, you would see kiosks of gift cards at every checkout stand. However, if you go to one of  its competitors, you would would be lucky (no pun intended) to find any gift cards. This is a huge business, and brings in a substantial amount of revenues near the end of calendar years.

With Safeway being in a recession resistant business, and with shoppers switching from name brands to Safeway generic brands which can provide higher profit margins, it makes Safeway an interesting story. The stock has a P/E of 15, a PEG of 1.21, and a yield of 1.1%.

Disclosure: The author owns AMZN, EBAY, and AAPL.

Comments

[Tom B]

I disagree about AMZN: high P/E; declining business model (music is going from CD to MP3); no "moat" (The Kindle is basically a JOKE compared to the iPod touch, which does a whole lot more than serve as an E-book).

[Opportunist]

The Kindle is the book business model of the future. Version 2 will do for Amazon in books what the iPod did for Apple in music.

[sbjforever]

Most readers like to turn a page, even if it's one bent back beneath a crumpled paperback. Seniors crave this too. I know, I'm one of them. I also like going into a bookstore when I'm on holiday, browsing for a good read. Imagine, carrying a Kindle around. Imagine, sitting in a coffee shop reading your Kindle. On the beach, trying to see the screen in the bright sunshine. Okay in the nursing home though.

[Toni]

AAPL is going down with market up. I was so convinced. Doris ?

[scutchen]

The Hidden Gem for Apple is the iPhone App Store.

Everyone is missing the forest for the trees. The iPhone is not a phone any more than a PC is an eMail box. The iPhone is broadband in your pocket, available anywhere, that happens to include a phone (unless it is an iPod Touch, with whatever broadband communications protocol develops there in addition to WIFI). With OSX, Apple has the software power and sophistication to do things with this class of device that are far, far beyond the capabilities of anyone else. Not Palm. Not RIM. Not Nokia. Not Windows CE. No one can touch the iPhone operating system capabilities. So they can create a mimic phone, but not a mimic device. Every review on someone's iPhone fighter say that they are beautiful, but don't have the iPhone's user interface and applications suite. Duh.

Now think about moving the iPhone beyond the software that Apple has put on it. Think for a moment about what kind of software applications capabilities are available to the iPhone hardware platform and OSX. Think about where the iPhone software development and distribution model may go. Don't think of porting Mac apps. This is a new device class. Open your Big Branes. This is as big as the original move from mainframes to PCs. And the stuff we do with an iPhone-class device will be as different from what we do with a PC that PCs were from IBM-3270 terminals. Imagine if the original Apple computers had the kind of development and applications distribution model and lead on the competition that the iPhone has, and the kind of technology and OS advantage that the iPhone has. Who can compete?

[huerix]

Thanks for a thought provoking article.

I agree on AAPL, GOOG, and SWY, in that order.

I think AMZN will do fairly well too, but kindle is not accretive enough to the bottom line.

Ebay is overpriced. While paypal is doing well, the ebay auction business is in serious trouble as their fee hikes have finally made it a less useful place to shop as listings continue to decline. (in fact me and several friends now just search AMZN instead for many items)

SHLD I am not sure about and would not buy- Sears is an absolutely terrible brand nowadays, the real estate factor is diminished now- just how much faith are we supposed to have in Lampert alone? With a PEG of 3? Land's End may be great but again not enough a % of bottom line!

[Tom B]

"Land's End may be great but again not enough a % of bottom line!"

Land's End WAS great; it's all cheap stuff made in China, now. They should spin themselves off, like Celestial Seasons parting from-- Kellogg was it?

[Brewer]

Agree on APPL, but not on Amazon or ebay. What you say are 'hidden gems' are the worst part of Amazon and eBay. The Kindle is a joke. Are you getting your tech advice from senior citizens?

[LonnieDevereaux]

Is it really spelled "Kindle". I bought it thinking it was a Kandle. It burned pretty well the first few nights, but nothing since. Just a scorched melted blob remains, welded to my kitchen counter. Don't think I could honestly recommend it. Oh well, they say we learn from our mist cakes, whatever those are. Why is life so confusing?

L. Devereaux

[MrTim]

Paypal isn't a gem, it's a lump of coal. 6,000 complaints filed against them with the BBB. EBay tried to force it as the only payment option on their Aussie site, but were shot down by the powers that be over there. Ebay is also being sued for antitrust violations for trying to tie Paypal in with eBay on their U.S. site. The only reason Paypal is still in business is because eBay has banned Google checkout and any other competitor to Paypal on their site. How long do you think they can violate the Sherman Act before someone stops their monopolistic policies? Not much longer, IMO. Do some research in the future before you recommend a stock that YOU own. EBay has enough media pals trying to hype their stock to death. EBay is dead as can be now and will soon be a $20 stock (or worse).

[Et tu,Brute!]

Sears? Sears?! SEARS?! SEARS (italics, bold, and underlined)?!

[VA]

MrTim has a weird logic - eBay sucks, dying, but, hey, famous Google's Checkout never took off because... eBay doesn't allow it on its site. And apparently eBay is the only internet company being sued (hint: it's not).

I wonder though - if eBay is so bad, and PayPal just terrible, why the company consistently keeps meeting (they missed only in one quarter in the last 6-7 years, I think) the targets and keeps growing?

eBay has a "vocal" (vociferous) set of critics, who, I guess, got burnt on the newest policies of pushing lousy sellers off the site. Be careful not to fall into their only (pathetic) way of revenge.

[Lemtrout]

Sears? They can't attract executives, merchandisers, brands, or customers - but you think they can attract investors? Interesting strategy, let's see how it plays out...

[outandabout]

It's pathetic to see all the same ebay sellers ranting on all articles. They are probably the bad sellers ebay is desperately trying to get rid off. Go open your own website and burn your buyers.

[dsg]

Have any of you guys actually used the Kindle? It is a great new technology. I can get any book I want any time I want it (or newspaper or magazine, etc). You can easily read it in the sunlight - I have it at the beach all the time. It is way easier to carry around than a lot of books and if you actually read it pays for itself quickly over buying actual books.

[Et tu,Brute!]

To outandabout

Defending a company whose CEO shows his baby picture at the annual national convention?

'Nuf said.

[justpurrfect]

So I'm one of the bad sellers ebay wants rid of?

Links to my feedback.. so you can see what bad looks like.

feedback.ebay.co.uk/ws...

feedback.ebay.co.uk/ws...

That's bad? I don't have as much recent feedback as I might have because I'm not getting the prices I used to.

[lemming]

I just bought all of the stocks you said to buy. I hope your right, or I am screwed