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What companies are tomorrow's big winners? In our ongoing series, I'm chatting with Fool analysts and advisors to find out the stocks on their watchlists and the catalysts that would induce them to buy. Today, Motley Fool analyst Andy Louis-Charles shares three companies he's watching. And for your convenience, the Fool now offers MyWatchlist.com, your free customized hub to follow the performance and Fool coverage of the companies you're watching.
One to watch
When the Inside Value service selected MasterCard (NYSE: MA ) in July 2006, shortly after its IPO, advisor Philip Durell encouraged his members to buy below $50 per share despite a recent 20% run-up. A year later, he wrote, "The shares have returned more than 250%, but it's time to say goodbye and sell [at $160]. Fundamentally, the company is strong, but the shares are trading $10 above our most optimistic valuation." And Andy recommended MasterCard in the Fool's report, Gold and Beyond: 7 Surprise Plays to Inflation-Proof Your Portfolio, about six months ago when stock was around $200. MasterCard has a way of never looking too cheap for too long, and that's true today, with shares at more than $235.
"It's a great business, they have ungodly margins, as they don't ever have to build factories or stores to grow -- it's a really clean business model," says Andy. "Unfortunately, as is usually the case with MasterCard, the valuation is a little richer than I'd like." If regulatory reform of the credit-card industry creates some noise that knocks down MasterCard's valuation by association, Andy would find shares attractive in the low $200s. Under $200 per share, and he's backing up the truck.
Two to watch
While MasterCard always looks good if expensive, companies in the for-profit education space generally look fairly cheap, but also fairly lousy. The industry has been battered with headlines declaring them diploma mills, pointing out that the only thing many students gain from their experience is a pile of debt. And now the Department of Education is stepping in to establish thresholds for accomplishment, safeguards that ensure the majority of students come out with more opportunity than when they began their programs. That means these companies likely will have to be more selective in their recruiting, going after those who are more likely to graduate, take advantage of new career opportunities, and not incidentally, pay off their loans.
This plays well for American Public Education (Nasdaq: APEI ) , where three-quarters of the students are active duty military personnel, members of the reserves, or veterans.
"Their students are generally more disciplined, more driven to accomplish their goals, plus the Department of Defense is paying the bills," says Andy. "It's a very attractive base of students."
The share price has rebounded from recent lows, but this industry attracts bad news faster than a posse of former teenage starlets. More is likely around the corner. When it hits, it's probable that all the companies will be knocked down -- some fairly, others less so. When shares look cheap, Andy's in.
Three to watch
Once upon a time, people mocked Amazon.com's business model -- why would anyone buy a book online when Barnes & Noble was just around the corner? An online retailer could never summon the same customer loyalty as an actual store with actual books. The same is true to some extent with PetMed Express (Nasdaq: PETS ) , an online purveyor of prescription medication for dogs, cats, and the rest of your furry friends. To date, the vast majority of pet owners still go to their vet for their pets' medications -- after all, he's just around the corner. But PetMed Express has the opportunity to beat the vet on both cost and convenience, especially when it comes to renewals of, say, heartworm medication, which doesn't require an office visit. The company's top line is growing at a healthy clip, providing hope that the company and its rivals are beginning to change user habit, breaking them of the vet.
Granted, it's a smaller market than the universe now dominated by Amazon, but pet meds are nothing to sneeze at. Something like 70 million households have pets, and the owners spend $45 billion per year to keep them happy and healthy. And PetMed now has 6% of the total pet med market, while its mail order rivals combine to control only 5%. Still, it's tough to teach old dogs (and their owners) new buying habits.
"I haven't gotten comfortable yet with how they're going to build loyalty and retain their customers, and how they build a sustainable moat around their business," Andy says. "They haven't proved they're the dominant brand in pet owner's minds quite yet. But as soon as they do, you're going to have to pay through the nose for the stock. But I think that if you believe in the concept and buy on dips, this could be a big long-term winner."
And that's exactly why it pays to watch. You can make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click below to start following one of the stocks mentioned above: