This article is part of our Rising Star Portfolios series.
It took me awhile to finally settle on the first small cap for my Rising Star multivitamin portfolio. But that's how it works in real life, right? You have things to do in addition to researching stocks including, occasionally, getting some sleep.
Here's the progression for those of you just tuning in:
Timing is nothing
If you'd bought the day my article came out, you'd be pretty happy because lululemon popped up 9% the next day when management raised guidance. Unfortunately for me, all portfolio purchases are carried out the day after the article is published, so I got in around $73 rather than $67. Oh well, that's also how it works in real life. And true to our Foolish teachings, I'm not going to get too upset by it. (Darn it.)
Not gonna buy 'em
I promised to explain why my other four candidates failed to make the cut. They were all interesting and had their strengths and may perform well in the future, but here's a quick look at why there weren't right for me at this time.
MercadoLibre (Nasdaq: MELI ) -- In my opinion, this stock is priced for perfection even if all were actually well with the business. But while I know MercadoLibre has a stranglehold on online commerce in Latin America, I'm worried about eBay (Nasdaq: EBAY ) and other competitors squeezing its growth opportunities elsewhere. It's also very hard to come up with a true growth estimate for MercadoLibre. Foolish colleague Matthew Argersinger has done some extensive analysis for the Big Short service and points out that all the earnings growth from last quarter came from nonoperational sources like expense reductions and foreign currency gains. Add in a troubling rise in accounts receivable -- which could indicate some difficulty in collecting bills -- and I decided to pass.
Ebix (Nasdaq: EBIX ) -- I like Ebix and may revisit it at a later time. But I shelved the idea this time around in order to dig deeper and figure a couple of things out. First, its valuation seems too good to be true. An earnings multiple of 18 with 50% growth rates, outstanding margins, and 33% return on equity? Why isn't the market rewarding the stock with a higher valuation? It might be because management acquires companies faster than Zsa Zsa Gabor does husbands. This makes it tough to understand the accounting. There's also the problem of one auditor citing "deficiencies" in Ebix's internal controls.
Puda Coal (Nasdaq: PUDA ) -- Similar to Ebix, Puda's risks outweighed its low valuation. This $279 million small fry is located in China's Shanxi province, and its auditor was recently fined by the Securities and Exchange Commission for "improper professional conduct in connection with annual audits and quarterly reviews of the financial statements" of another Chinese company, China Energy Savings Technology. Realizing it will take me a long time to understand the risks here, I shelved Puda for now.
ZAGG (Nasdaq: ZAGG ) -- ZAGG carried a market cap of about $160 million when it passed the Foolish 8 screen, by rule too small for me to add to my Rising Star portfolio (minimum: $200 million). I didn't really get a chance to dig into the business, and the stock is now up more than 30% in just the past three weeks. Oh, well.
Am I wrong to have passed on these companies? Let me know in the comments below, or join us on my Rising Star discussion board.
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