With a title like Finding the Next Starbucks, how could an investor look the other way? Michael Moe's book caught my attention, not to mention a couple of clicks on my Amazon account. I'm an easy target for these kinds of things, but in this case, Moe did a fine job.
Moe has credibility to spare. He's the CEO and co-founder of ThinkEquity Partners, and he was once a director of global growth stock research at Merrill Lynch. Back in 1992, he had the prescience to invest in the IPO of Starbucks (Nasdaq: SBUX ) when the java giant had a market cap of $220 million. Now it's valued at $19 billion. Moe's other great picks include Apollo Group (Nasdaq; APOL) and Google (Nasdaq: GOOG ) . Moe even said that Google was "cheap" when interviewed on CNBC during the company's eagerly awaited IPO.
Like any good analyst, Moe crunches numbers on the top-performing stocks for different periods in history. From this data, he tries to find common themes. Among the top 25 performing companies of the past 10 years, Moe found that the average market caps at the start roughly equaled $199 million. In the world of Wall Street, this is definitely a small cap -- maybe even a microcap.
These types of stocks usually have minimal analyst coverage, and they target poorly understood markets. To find the big winners, Moe says, you need to think like a venture capitalist (VC), seeking "megatrends" -- markets poised for an overwhelming wave of growth. Megatrends powered the rise of railroads, autos, mainframes, PCs, the Internet, and so on.
A big chunk of Moe's book discusses these megatrends, including open source, private education, online personalization, and even spiritual products. Along the way, he provides excerpts of interviews with thought leaders such as Mike Milken, Salesforce.com's (NYSE: CRM ) Marc Benioff, and the Carlyle Group's Ed Mathias. To get the entire interviews, you can go to Moe's web site, findingthenextstarbucks.com.
Once you've spotted megatrends, Moe recommends the Four Ps: people, product, potential, and predictability. While part of his analysis requires some calculations, his approach is fairly subjective. He tries to identify companies that "own their niche" and "introduce proprietary products." (As Berkshire Hathaway's Warren Buffett likes to say, a company needs a moat.)
Another critical element is the business model. Moe wants a company that has a recurring revenue stream. Such predictability is usually a big help in getting Wall Street's support.
Moe also wants to see companies that have "pricing elasticity and control over their margins." For example, over the past 15 years, Starbucks has been able to steadily raise prices despite increased competition.
At the end of the book, Moe provides a variety of case studies that make side-by-side comparisons. Why did Intel (Nasdaq: INTC ) beat Advanced Micro Devices (NYSE: AMD ) ? How did Dell trounce Gateway (NYSE: GTW ) ? It's a great exercise, but Moe ultimately seems to run out of gas. Some of the information is fuzzy, and it's tough to see why some of these companies wound up being the gorillas in their industries.
Finding stellar investments is never easy, but Moe does offer lots of useful tools and examples to make the book worthwhile. You still may not find the next Starbucks, but at least you'll have a strong framework for analyzing up-and-coming growth stocks.
Intel is an Inside Value pick. Dell is both an Inside Value and Stock Advisor pick. Amazon and Starbucks are also Stock Advisor selections.
Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,831 out of 30,414 in CAPS.