“Always” is always a dangerous word in investing, but here’s a good time to use it: Always own some stocks of profitless good firms. Some are turnarounds. Others fund growth through legally deductible futuristic expenses that mask profitability while avoiding taxes. Both needlessly confuse and scare off most investors, who are guided solely, mostly or too much by earnings.
As a result, these underappreciated firms get bid up as they otherwise progress in the real-world marketplace. When I had nothing and had nothing to lose, these were the only kind I bought. While you don’t want profitless bad companies, of course, the profitless good firm is a beautiful thing to behold.
Case in point: I last recommended Amazon (AMZN, 482) (AMZN, Financial) in January 2013 at $258. This July, on the 24th Forbes Cruise for Investors, I was asked how it can be worth more than $200 billion yet never earn material profits? First, if it did, it would pay material taxes. Why are taxes good? Second, it still self-funds strong sales growth with an okay balance sheet. Third, it’s at only 2.5 times revenue, cheap for any real growth stock.
But the killer? More and more it simply dominates retailing. Whatever it is, if it isn’t on Amazon you probably don’t need it (except securities–and probably even them soon). Don’t believe me? Try searching for bizarre esoterica you expect only in a niche specialty store far, far away. Profits later; dominance now! Amazon is an “old tech” name yet merely 21 years young, barely drinking age. As such, this huge category killer fits perfectly into my vision of “old tech” leading this bull market’s golden years.
So do I just have my head in the clouds? Well, surely for Salesforce.com CRM -1.38% (CRM, Financial). It’s a perfect pure play on the cloud, providing enterprise cloud-computing solutions for business. I first recommended it at $33 in April 2011. It has compounded more than 20% a year since while never really earning any money. That should continue as its customer relationship management (CRM) technology and “software as a service” keep gaining credence. For those value-prone: Its price-to-revenue ratio is now far less than what it was when I recommended it in 2011.
So if Amazon has everything you need, why am I for the first time recommendingTARGET TGT -1.61% (TGT, Financial), America’s third-largest discount retailer? After all, it is losing money and up against Wal-Mart; discount margins are thin in the best of times. Am I just nuts? Well, I’m crazy for solid turnarounds. Yes, Amazon is changing everything, but as behaviorists teach us, people are slow to learn, and Target didn’t get to be number three in a tough turf for no reason. It has great locations and great merchandising. It has been trimming and toughening. And I think it will earn $5 billion in two years. By then the stock should be up 50%. You get a 2.5% dividend yield while waiting.
