Another Path to Profit: Riding eBay's Coattails

Investors always like a winning story. Impressive long-term returns from companies such as IBM, Hansen Natural, and Best Buy captivate our attention and serve as a guide for finding the next great stock. Investors in online trading maven and Motley Fool Stock Advisor recommendation eBay (Nasdaq: EBAY  ) have taken part in a great story as well -- stock in the company has risen 1,600% since its IPO in 1998.

And while there is much debate today as to whether eBay can continue rapid growth and beat the market going forward, there are other ways to profit from a company that has already proven itself a winner. Riding the coattails of an industry-leading company can sometimes be even more profitable for investors, but it helps to know where to look first.

Finding the tail on this coat
There's no doubt that eBay fostered the emergence and growth of a hugely profitable online marketplace, even distancing itself above online competitor and partner Yahoo! (Nasdaq: YHOO  ) . But it's tough to move the growth needle on the $46 billion company, which has spent the last several years fueling growth by acquiring complementary businesses such as PayPal and Skype. There may, however, be some compelling investment opportunities out there that share in eBay's success, but offer much better growth potential. If we can nail down some companies profiting from the burgeoning ecosystem eBay is driving, maybe we'll find a buried treasure worthy of investment.

I think conventional wisdom about coattail companies is sometimes too limited. Typically, investors think that coattail companies are simply direct suppliers or partners of a large, successful firm. But I think there may be even more opportunities hiding from investors, beyond direct connections with an industry leader like eBay.

For instance, a company can find great success by providing niche products or services that eBay doesn't. Alternately, a firm can use a similar online platform to sell products within the business-to-business space, as LoopNet (Nasdaq: LOOP  ) does in the commercial real estate market. This is where Motley Fool CAPS can really help; the Fool's massive stock database has abundant tools for finding and researching stocks and stock pickers.

Tagging along with CAPS
With CAPS, investors can look through eBay's tag list for other companies sporting similar attributes. For instance, eBay has tags such as "Auction," "Catalog & Mail Order Houses," and "Voice Over Internet (VoIP)." Additionally, links to Motley Fool analyses, news releases, and discussion boards are at your fingertips.

CAPS also lets the 60,000-plus investor members comment on the companies they rate. Their opinions often contain peer analysis and recommendations for related companies. Sometimes, these resources turn up companies that have little or no direct connection to eBay, but contain similar qualities that could make them attractive investments.

Perusing the tags, comments, and blogs could lead an investor to interesting companies such as Chinese partner TOM Online (Nasdaq: TOMO  ) . One of the leading Chinese Internet portals, its focus on value-added wireless services in a booming domestic mobile market makes it an attractive partner with eBay. Another interesting prospect is phone number clearing agent NeuStar (NYSE: NSR  ) , which has a significant moat in its area of provisioning services for communications providers, consistently yielding net margins above 20% on revenue that is growing nearly 40% per year. Or how about coattail company Liquidity Services (Nasdaq: LQDT  ) which provides an online marketplace for wholesale, surplus and salvage items often needed by industrial and government institutions. Insiders own more than 60% of the company and revenues have grown by 48.5% in the past 12 months, making many CAPS investors -- and a few Fools -- optimistic about its future.

Tail wagging
Of course, plenty of coattail investments have proven to be shallow companies or copycats that ultimately flopped for investors. For this reason, CAPS is best used as a research tool and means to find investments, and not a device to pick stocks. Investors should always perform their own due diligence on companies rather than take a blanket recommendation. But you can't beat the information and resources for the price -- which, by the way, is free.

Is there another stock you know about that has eBay's wind in its sail? Give your own opinion in Motley Fool CAPS.

eBay, TOM Online and Yahoo are Motley Fool Stock Advisor picks. A free 30-day trial to the market- beating newsletter service is yours -- just follow this link.

Fool contributor Dave Mock has never worn a coat with tails, and prefers the waiter style. He owns no shares of companies mentioned here. Best Buy is an Stock Advisor recommendation. LoopNet is both a Motley Fool Hidden Gems and Rule Breakers pick. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy is imitated but never duplicated.


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