Below is an interview with Allopezyanez:

Q: Alfredo, congratulations on winning the stock market competition. Your stock pick, Tata Motors, blew away the competition. What made you choose this company?

First of all, I choose Tata because I hadn’t heard anybody talk too much about this company on CSP. The company is the biggest maker of cars and trucks in India, which I believe gives them a competitive advantage in the region against foreign players. I am also a die-hard fanatic of cars, so I know the car industry extremely well.

And not only that, Tata owns several subsidiaries that make it a big player in the automotive world: Land Rover and Jaguar, both of which had terrific sales in Q1. Now, I also believe the future looks brighter for these brands as British Engineers becomes in charge of rebuilding these brand-models – Think of…the remake of Jaguar! And as the economy improves, this part of the company is set to have stronger results.

To top it all off, Tata is the maker of the Tata Nano, the world’s cheapest car in production. And despite the terrible year they had during the economic down-turn, I believe Tata is well positioned to grow and make you money.

Q: You are one of our top forum posters and detected the McDonald’s menu changes upside well before the Wall Street analysts. Do you think McDonald’s is still a good buy given its recent run-up?

Absolutely, I think MCD is well positioned to do extremely well in the future with its new specialty drinks. From my experience working there, the smoothies and frappes have become such a popular item in the stores, exactly what corporate McDonalds expected it to be.  Now, from a buying perspective I would say it is a moderate-buy, not a strong-buy since the company has already a large market-cap. Oh, and remember those stories in the papers about low supply for smoothie base, it hasn’t been fixed due to such high demand…Trust me on this one!

Q: What is your dream job?

Manager of my own fund I think would be the coolest job in the world; you get to allocate funds within different asset-classes with your own devised plan. You get to compete with the market’s best and smartest people, but I believe the coolest part of this job is the process that you go through and how you make your investment decisions. In the end, what you invest in is your decision no matter what the analysts and other people around you say.

Q: What is your favorite thing about CSP and how has it helped you?

There’s so much knowledge and so many great ideas about investing and business exchanged at College Stock Picks with people you can absolutely relate to; best of all… IT’S FREE! And I encourage everyone to try CSP; you will learn new ways of thinking about investing, learn about new industries, and business-trends that could potentially become the next big-thing.

Anyone who has ever been inside a Buffalo Wild Wings restaurant know exactly what this company prides themselves on. The combination of a great variety of good food and the overall inviting atmosphere of the restaurants come together to really distinguish Buffalo Wild Wings as more than just a place to go get a quick bite to eat, but a fun dining experience. As students, we eat at so many different restaurants that, whether we realize or not, we have developed an eye for whether these types of establishments actually have the appeal they claim.

FOOD: BWLD has done a particularly good job in diversifying the available eating options at their bar and grill restaurants. Ranging from quick casual to casual dining, whether someone wants to grab some wings to-go or have a sit down dinner with the family, BWLD can accommodate. Then once you begin reading the menu, you realize the great variety of food they offer. Wings for watching sports with the guys, ribs and burgers for a big, sit-down dinner, and even mini corn dogs and chicken tenders for the kids, all of which can be topped off with any of their 14 Signature Sauces, BWLD simply has whatever you need. And to top it all off, each restaurant has a full bar complete with twenty kinds of local and foreign beers, wine, and liquors. The fact is that unless you are looking for a quiet, upscale dining experience, BWLD suits your needs.

ATMOSPHERE: BWLD really prides itself on its energetic and family-friendly setting. From the moment you walk into the restaurant, you just feel welcome and excited to be there. The sports posters and jerseys hanging on the walls, the dozens of wide screen TV’s, and the energy of the employees and other guests all just simply make you enjoy being there. You can tell that the feel of the restaurant is quite similar to its biggest competitor, Hooters. However, unlike Hooters, BWLD has succeeded at making their restaurant more than just a “Guys Night Out” kind of place. While it definitely is a great place to go watch the game with your friends, BWLD is a much more family-oriented restaurant, probably more along the lines of Chili’s but with a much more excited and energized atmosphere.

OPERATIONS: BWLD management appears to know both what to do to grow and how to do it. Their stringent criteria for evaluating new restaurant locations, their training program for both managers and employees, their involvement of franchises in company decisions, and intense focus on the quality of their products paints this company as one that really knows how to manage and expand a business. On top of these operational skills, BWLD has created an advertising campaign that many (including myself) consider one of the best in the country, strengthening the brand. Both revenue and earnings have steadily grown over the last 5 years, same store sales continue to climb, and the company carries no debt on their balance sheet.

FINAL THOUGHTS:

• BWLD variety of dining experiences makes it appealing to multiple target markets
• I feel they have not yet branded themselves as strongly as Hooters, the premier US sports bar, probably due to less specialization in a particular market
• Atmosphere is BWLD’s biggest strength. The restaurants look exciting and fun, the staff is happy and energetic, and people just enjoy the experience of eating here (even the website is fun and entertaining)
• BWLD features  a P/F (price-to-FaceBook fan ratio) of 644 K (what this mean, I have no idea)
• With no debt and disciplined operations and growth strategy, I think BWLD has potential for further expansion, both domestic and foreign (where they do not yet exist)

We can’t really blame Wall Street analysts for continually misunderstanding companies like Panera. They are so far removed from the youthful trends that drive their business that it is nearly impossible for them to detect major changes in the company– until it’s too late. This weakness of Wall Street analysts can be exploited by examining the driving force behind these youthful trends— college students. At CollegeStockPicks.com, we apply this approach to stocks in the gaming, fashion, food, and technology sectors to obtain a real edge in the market. Now, let’s see what our community thinks about Panera.

What about Panera?

Whatever the folks at the St. Louis-based Panera Company are doing, they’re doing it right. Aside from a brief dip in late 2008 (perhaps due to expansion to Canada or a brief lawsuit in addition to the poor economic climate), Panera stock has been steadily rising for the past several years, and for good reason. In 2008, a Health Magazine study said that Panera Bread was judged America’s most healthy fast food restaurant. In 2009, the Zagat named Panera one of the most popular restaurants for eating on the go, and among chains with fewer than 5,000 locations, Panera was also rated first for Best Healthy Option, Best Salad, and Best Facilities.

Regardless of what you think of the food, it’s hard to argue with Panera’s business model. The St. Louis-based bread purveyor principally locates its restaurants in suburban, strip mall, and regional mall areas, undoubtedly leading to company-wide growth since it went national in 1999. Not only are these areas becoming more popular, but with a menu highlighted by antibiotic-free chicken, whole grain bread, and all-natural ingredients, Panera’s bakery-cafe style food fits (and may have even helped start) the increasing trend of healthier fast-food chains. It’s a great place to hang out, if you’ve ever been there, making it attractive to high school and college students looking for somewhere to meet up for a quick bite. In fact, I was able to stop by and do that just recently at one of their Dallas locations:

I’d like to think that the one I visited is a prototypical Panera restaurant: the Park Lane & Central location (#994) is in a suburban area right across the street from Northpark Mall, a huge complex in North Dallas. Adjacent to a bank and an Italian joint, with adequate parking and easy access, it’s no wonder that the place was still buzzing past 2:00. Though there were plenty of professionals there for lunch, I certainly didn’t feel out of place in flip-flops and baseball cap with shirt untucked. In fact, not only were there all kinds of dress, but all kinds of people in the clothes themselves: singles, couples, groups, lunch-breakers, and computer-toters alike were spread out inside the tastefully designed space. Granted, it’s not empty of the cutesy affectations that tend to go along with chain bakeries and cafes, but it’s certainly not enough to turn you off before you order your food. The menu is easily read and was explained to stupid-old-me by a willing cashier. Actually, each one of the employees seemed upbeat and happy to be there, from the guy who held the door open for a leaving group to the group of what appeared to be managerial staff eating lunch and going over some paperwork. However, the thing that concerned me, and what will probably concern most college students, is that a half sandwich-half salad combo with a soda ran me $10.01. Now, is ten bucks going to break the bank? Probably not. But I did cringe a little bit as I handed over my debit card, knowing that I could get as much food for three or four dollars less somewhere else. Those misgivings disappeared once the food came, a delicious chicken sandwich and caesar salad, topped off with a complimentary half-baguette of fresh baked-on-location Panera bread. The bread was the best part, and that does nothing to take away from the rest of the meal. Despite the relatively high cost for the product, I found myself wanting to go back in the near future. What does this tell me? That even as a “poor” college student on a budget, the experience that Panera offers makes the extra dough worth it. That’s why people tend to come back for more.

On the economic side of things, Panera also looks to be one of the strongest in its class: even through the recent recession, total revenue has increased by average of 14.74% since December of 2006. In addition, total number of cafes, earnings per share, and net income have nearly doubled since 2004. Projections have the Missouri company opening their 1,400th store this year, a fact that might lead some to think that a “niche” restaurant like Panera could be reaching its level of saturation. They’d have a valid point: after all, only 69 new locations were opened in 2009 compared to 102 in 2008 and 169 in 2007. However, according to Panera’s annual report released in March of 2010 indicates that the newest locations have been just as profitable as existing ones in their first year, proving that the market is still as strong as it ever was for Panera Bread.

And it’s easy to see why, because Panera appeals to such a large group of people. Not only students, but also young families and the many who look for an alternative for traditional fast food. Panera’s restaurant breaks the mold when it comes to most other fast food restaurants, not only in the healthier quality of the food, but also the atmosphere of each individual location. It excels in creating a relaxed, cool, and modern feel that makes it a great place to go out and eat. Plus, most stores provide free wireless internet access, a huge bonus for those looking to combine work and leisure. The only downside for college-aged kids is that Panera tends to be a little pricier than standard fast food fare: a typical “meal” will probably run you $1.00-1.50 more than one at McDonald’s or Jack-In-The-Box, but the difference in cost is becoming less substantial as we come out of a rough economic period. And let’s be honest, unless we are really strapped for cash, we’re not going to avoid a restaurant all together over an extra buck and a half.

No matter from what angle you look at it, Panera has a lot to offer. Financial strength, quality of food, and continued expansion are all things to be excited about if you’re an investor. It’s for these reasons that we see Panera as a not only as a solid stock, but a solid place to go pick up half a sandwich and some soup.

At CollegeStockPicks.com, we’ve talked to college students across the country to find out the real scoop behind Panera. We’ve used the college edge, we’ve run the numbers, and we have to tell you, the Wall Street analysts are way off the mark.

The College Edge!

Our unique college insight gives us an edge on Wall Street analysts, but we realize that even this is not enough. After all, great companies can sometimes be poor investments if the valuation is just too high. That’s why at Collegestockpicks.com, we combine our knowledge of youthful trends with the investing acumen of Connor Haley, a former nationally ranked chess player, Harvard student, and expert stock analyst whose market-beating track record makes him living proof that his method works. Connor can run a DCF model with the best of them–but he brings a unique college perspective and insight that make his picks truly stand out from the pack.

At CollegeStockPicks.com, you can discover the youthful trends that are sweeping the country. You can use the knowledge of college students–the people who are closest to those trends and understand them the best–to differentiate the short-term fads from the long-term trends. You can turn that knowledge into powerful investing advice–on both the long and the short side. And best of all–you can do it before Wall Street catches on in the first place. Join us on Facebook, follow us on Twitter, and head to CollegeStockPicks.com for more college insight!

This article was written by Carson Chapman and the CollegeStockPicks.com staff

College students are price conscious.  Spending more than $10 on food is quite an extravagance.  It would seem likely, then, that a company that sells high end, high priced products would experience a significant drop in revenue if it were to raise its prices slightly.

Whole Foods Inc. (NYSE: WFMI), is quite the exception.  Its consumers have tremendous brand loyalty, and the company has experienced steady growth despite the climbing prices of many of its most notable goods, especially organic food.  A company selling high-end products that can expand in a down economy could be very intriguing for investors.

Last weekend, I decided to further examine Whole Foods.  I wanted to find out if the company had policies specifically meant to expand its consumer base, and I wanted to buy pita chips.  I was also curious to know how the management operated: friendly, accessible, and quick thinking managers are always indicators of successful companies, recession or not.

Many of my friends shop at Whole Foods, even though the prices are sometimes out of reach for many college students.  Often, a college student, especially and environmentally conscious one, will buy granola and other organic foods from Whole Foods regularly but in small amounts.  Among health conscious and environmentally conscious students, Whole Foods has tremendous brand loyalty, in part because it is the only major retailer who has the economies of scale to sell organic foods at a reasonable price.  However, there is a sizeable minority of college students who feel that Whole Foods is too mainstream and that Trader Joe’s has a more small business feel.  Yet, due to strong financing and projected annual sales of $8.5 billion[1], Whole Foods is greatly posed for expansion, and it will likely maintain a much greater market share than Trader Joe’s.  Although the company experienced a drop in net income from $182,740,000 in 2007 to $114,524,000 in 2008 likely as a result of worldwide recession, its net income has rebounded in 2009 to $146,804,000.  Gross profit has steadily expanded in the past three years; it was $2,296,603,000 in 2007, $2,706,705,000 in 2008, and $2,754,310,000 in 2009.   Indeed, the company plans to open 17 stores in 2011, 15 stores in 2012, and 8 stores in 2013[2].  The company had 186 stores in 2007, but it had 275 stores open in 2009 with 15 planned for development.  Hence, despite recession, the company is in a period of rapid expansion, and it is very likely that this expansion will be reflected in its future share price.

Whole Foods markets itself uniquely.  The stores notoriety is spread word of mouth, especially amongst health conscious teenagers, college students, and young adults.  Its CEO, John Mackey, is quite visible in the media.  Through several interviews and his blog, he is unafraid to express his love of free-market capitalism, his skepticism of big government, and his disquietude over public health insurance.  While these opinions may superficially contradict those of Whole Food’s stereotypical customer, the alternative, granola-chewing tree hugging environmentalist, Mackey’s philosophy is quite similar to that of a growing number of college students.  For one thing, Mackey has the natural demeanor of a college student: he dresses casually, speaks unpretentiously, and he deftly adapts to online media and technology.  Furthermore, many college students embrace Mackey’s libertarian ideals and his belief in “socially conscious capitalism:” the idea that free enterprise is not operated by greedy barons but by entrepreneurs who truly desire social change.  Hence, Mackey has strong appeal with many college aged kids and young adults who support healthy lifestyles and free markets.

Stepping inside Whole Foods, I did not see too many young people, but the store was reasonably filled with middle aged adults and elderly people.  Considering that I went on a beautiful summer Saturday in the late afternoon, I was likely in a very small minority of teenagers who chose to spend a precious weekend going grocery shopping.  No worries, I thought, I’ll simply go talk to the management to find out whether Whole Foods was working on developing a policy of overall expansion and expansion within different demographics, especially youths.

I had no trouble talking to the management whatsoever.  I simply walked up to a sales associate, and he introduced me to the manager for the shift.  He affably told me that while Whole Foods is not doing anything in particular to attract youths, he claimed that many young people already come to the store.  He also added that many college students seasonally work for Whole Foods and that many college aged employees take advantage of a company program in which employees receive discounts for maintaining a healthy, active lifestyle.  He also added that Whole Foods was trying to attract more customers through price cuts amongst organic items.

I was surprised that even though Whole Foods did not have an official strategy to attract youth, it appeared to be doing so anyway.  This shows that Whole Foods has a strong underlying appeal with youth and possibly with many other demographics, especially suburbanites and yuppies.  I also realized that if Whole Foods can attract a large amount of customers with relatively high priced goods, the number of customers it will attract with even lower prices could be enormous. As I continued perusing the aisles, I realized that Whole Foods may be pursuing other demographics, especially the youth demographics, implicitly by offering generous deals on comparatively high-end products that are often popular among college students and that cannot be purchased at mom and pop grocery stores and convenience stores.

(my apologies for unprofessional camera work)

Case in point: the exact product I came to buy was discounted.  Pita chips are somewhat of a delicacy among college kids, a snack staple.

Once again, another popular college product discounted.  Sparkling juice has the same allure as soft drinks such as Fresca, a higher end Coca-Cola product.  My friends and I often drink it on weekends not in large but in consistent quantities.

The ultimate alternative breakfast mainstay: organic cereal.  No, it is not as cheap as a box of Lucky Charms from Wal-Mart, but considering how inelastic organic food is for nature lovers, this deal could pose some gains for Whole Foods.

I ended my day satisfied, with pita chips and hummus.

Bottom Line:

Whole Foods will never be as big as Wal-Mart or Target.  It is fundamentally a niche store, although that niche has very powerful buying power, and within that niche, the demand for many of the products sold at Whole Foods is very inelastic.  Furthermore, Whole Foods’ employees receive extensive health care benefits and are not unionized: this has likely lowered the company’s costs, and it has led to an overall positive sentiment from the employees towards the company.

At a first glance, Whole Foods’s share price may appear to be overvalued.  It’s PEG five year expected ratio is 1.69, which would frighten many Wall Street analysts as being too high.  Nevertheless, Whole Foods is a fundamentally sound company posed for growth.  Good businesses outweigh standard ratio models.

Last Note: Currently, Whole Foods Inc. does not have a large, widely “liked” Facebook page.  However, many individual stores have their own Facebook pages, including the Franklin, Tennessee store and a Las Vegas store.  Hence, although some teens feel that Trader Joes has the edge in local appeal, Whole Foods is certainly expanding in that realm through the most popular website for young people.  This strategy may also work in expanding growth among older adults, as more and more elderly people are activating Facebook accounts (yes, this may sound shocking, but quite a few of my friends’ grandparents have created Facebook accounts).  Certainly, while management may not admit to having an official policy to expand growth amongst certain demographics, I suspect that Whole Foods will expand tremendously, maybe not so inadvertently.

This article was written by Rob Boling and the CollegeStockPicks.com staff

[1] Source: http://www2.wholefoodsmarket.com/blogs/jmackey/

[2] Source: Whole Foods Market Inc. Annual Report 10k SEC Filing 0-19797

-Warren Buffett, Fortune Magazine

Warren Buffet knows a thing or two about investing. Before you can pick good stocks, you have to find good businesses, and you can analyze the strength of a business by examining its competitive advantage, so let’s go through the different types.

Ever seen the show NCIS? It’s a personal favorite, and it stands for “Naval Criminal Investigative Service.” Fortunately, the acronym also works for remembering the four types of competitive advantage:

The Four Sources of Economic Moats

NCIS: Network Effects, Cost Advantages, Intangible Assets, Switching Costs

1)      Network Effects (eBay, Facebook)

Explanation: Can you imagine Facebook with three users? It would be pretty worthless. However, the more users that join it, the more valuable it becomes. We call this the network effect.

2)      Cost Advantages

1. Economies of Scale (Walmart)
2. Geographic Advantages (Miners)

Explanation: Ever wonder why Walmart can charge the lowest prices? It sells more products than anyone in the world, so it has incredible bargaining power when it “buys in bulk.” Therefore, they get to buy their products from their suppliers at the cheapest prices, and then they pass those along to the customer.

3)      Intangible Assets

1. Brands (Under Armour)
2. Patents (Healthcare)
3. Regulatory Licenses

Explanation: You have to be very careful with intangible assets because it is very easy to mistake a brand for competitive advantage. With a case like Under Armour though, the company still has over 70% of the compression shirt market, even though Nike and Adidas have come out with identical products. The product is essentially called “Under Armour” now. Their brand is definitely a competitive advantage.

4)      Switching Costs

1. Tight Integration with Businesses (Microsoft)
2. Retraining Costs
3. Contractual Obligation (Verizon)

Explanation: Microsoft is so established with businesses that it would be a huge pain to switch. This allows them to charge higher prices over time and get away with it because it is not worth the hassle of switching.

Being able to analyze competitive advantage is crucial because it can help you separate great companies that can grow for years from short-term fads that will be overrun by the competition.

Four Mistaken Moats:

1. Great Products
2. Market Share
3. Operational Efficiency
4. Talented Management

Hopefully, this article gives you a better sense of how to analyze a company’s competitive advantage. Make sure to keep these ideas in mind as you start thinking about your favorite companies. Head to our forum to discuss this post and competitive advantage with other members.

This article was written by Connor Haley and the CollegeStockPicks.com team

Other products don’t fare so well.  Crocs were a hot commodity for a while for some investors, but they soon lost their appeal among college students.  After a period of rapid expansion, the company began closing some of its factories, and its stock price, which was once over $70.00, has now declined to $10.08 a share.

The long term popularity of a retail company’s product ultimately determines the success or failure of the company’s stock.  Companies that manufacture trends often outperform the market, and those that produce fad products often slide into failure.  Wall Street analysts cannot predict whether a product is going to be a fad or a trend; that is simply not reflected on balance sheets.  That’s where college students come in.

Steve Madden Ltd. (Nasdaq: SHOO) is a shoe retailer and wholesaler.  Traditionally a wholesaler, the company has recently been expanding its retail operations, and more and more stores are opening in malls across the country.  Financially, the company is sound.  The company has seen a steady increase in net sales since 2007; it had $431 million in sales in 2007, $457 million in 2008, and $503 million in 2009.  The company has no long term debt, and shareholders’ equity has risen, from $206 million in 2008 to $268 million in 2009.  Clearly, the company has the funds available for expansion. Its net income has expanded steadily over the last three years; it was $36 million in 2007, but it fell to $28 million in 2008 before rising to $50 million in 2009.      Analysts expect the company to grow over five years at an annual rate of 15.00 %.  Its PEG ratio (price/earnings divided by expected growth rate) is .94; a general rule-of-thumb is that companies with a PEG ratio below 1.00 are undervalued.  On paper, the company appears to be a strong buy.

At a closer look, however, Steve Madden’s outlook doesn’t appear so rosy.  Although the stock has outperformed the S&P 500 Footwear Index from 2004 to 2009, its growth in the retail sector will ultimately determine whether the stock will outperform the market or not.  Steve Madden is trying to expand in all retail markets, including men’s, women’s, and children’s.  It appears unlikely that Steve Madden will even have a chance of becoming a trend in the men’s and children’s market.  Steve Madden shoes, like Uggs, aren’t perceived as being manly.  Talk to any man in high school or college: chances are he thinks that Steve Madden is John’s cousin (one of my close friends asked me that when I mentioned the company).  Furthermore, Steve Madden’s shoes are too pricy for children.  Marketed as trendy, urban footwear, Steve Madden shoes are unlikely to appeal to the parent’s of young children as a substitute for Adidas and Sketchers.  Take my word, you probably won’t find children wearing Steve Madden shoes at the playground.

This doesn’t mean that Steve Madden has its staunch aficionados.  Many of my female friends buy them instead of Uggs.  I am confident that sales will grow in the women’s market, especially among women in their twenties.  On high schools and college campuses during the winter, Steve Madden shoes can already be seen extensively.  However, all women, even the ones who swear by Steve Madden, admit that Steve Madden shoes are pricey.  Hence, in order for net income to continue growing, margins will have to stay high (only the most affluent women can afford to buy more than one pair of Steve Madden shoes at a time).  Currently, that appears to be the case.  Profit margins for the past twelve months have averaged 11.16% and operating margins for the past twelve months have averaged 17.80%.

I went to visit a local Steve Madden store during the afternoon this past Memorial Day.  I wanted to talk to management to find out if the company had any particular strategy for increasing sales, and I hoped to find out how many consumers, on average,

visited the store and how many shoes were being sold on average daily.  To my surprise, I was the only person there.  Apparently, Steve Madden summer apparel isn’t a particularly hot product in the Chicago product, at least in 2010 (but of course that could change).  I spoke with the store’s manager, and she told me that the company is trying to expand sales across the board, with every demographic.  She sounded as if thecompany appeared desperate to find new customers, as if Steve Madden hadn’t reached the point to market to specific demographics.  The manager told me that the store was tracking how many people entered and purchased items each day, but she would not let me see these data.

This growth strategy seemed to be at odds with the marketing strategies displayed in the store.  Techno music was blasting in the background, the lights were dim, and vintage music videos were playing on two television screens behind the cashier.  I thought that Steve Madden was specifically trying to market itself to women, almost exclusively to younger women.  All of the shoes on display were meant for females.

No boots were on display, but several high end shoes were.  It was evident, though, that these shoes weren’t exactly flying off the shelves.  The dominant strategy for increasing sales appeared to be cutting prices quite sharply.

I was surprised after my visit.  The dearth of life in the store conflicted with the company’s robust balance sheet.  I felt that the company needed to change its marketing strategy, possibly by hiring a celebrity for a massive endorsement campaign.

After reading their company filings, analyzing the business, talking to my friends, and even visiting the store, I have concluded that Steve Madden has created quite a niche for itself in the high-end women’s apparel market. At just under 1.00 Peg, the company seems reasonably valued. The only problem I have is that analysts’ expectations for EPS growth are quite high at 15% per year for the next five years; this seems too optimistic.  The company would have to increase its sales across several demographics to achieve this level of growth, and from my visit to the store and conversations with my friends, this seems unlikely.  Moreover, the company is currently valued at nearly a billion dollars, and while they have a nice niche for themselves in the women’s high end apparel market, I don’t see them growing fast enough to keep up with analysts’ current expectations.  I would wait for a pullback before investing in this company.

This article was written by Rob Boling and the CollegeStockPicks.com staff

For our very first stock selection in The College Edge, I am going to go a bit out of the box by recommending an online dating company, Spark Networks (LOV). This may not be as much of a college trend as you were expecting, but if you really think about it, college students have a very unique view on this industry.

College life is about as social as it gets, and many people meet their future spouse at school. However, for those who don’t, they often have a very difficult time finding new people to date as they step into the “real world” and face the pressures from corporate America, often in a new city where they do not have any friends.

This is where online dating comes into play. College students are extremely web savvy, and as the internet has grown, online dating has exploded. In addition, the “social stigma” surrounding online dating is gradually fading away. All of this has created an excellent investing opportunity for investors today because online dating (especially niche dating sites) is a great business.

With downside protection from a recent buyout offer, an inflection point in number of subscribers, a strong likelihood for a higher buyout bid, and a ridiculously cheap valuation, Spark Networks (LOV) is one of my favorite current holdings. Shares currently trade at $3.47, but I value them closer to $6. Even my most conservative estimate (which I share below) values them $4.21, or 20% undervalued.

For those unfamiliar with this small-cap (70 MM), they operate several different niche online dating sites, most notably JDate.com.

Online dating (especially niche dating sites) is a great business:

• Customers supply the inventory (pictures of themselves)
• The company has negative working capital benefit (subscribers pay monthly subscription upfront)
• Online subscription dating industry averages 20% operating margins (Match, Meetic, Spark)
• Subscription based dating is an attractive oligopoly: Top 5 control 80% of the market, generate $1.2bn in revenue with industry profits of $240mn+ annually.
• Attractive value proposition— avg sub pays $27.50 for JDate and $15 for other affinity
• 100mn singles in US (short cycle, high churn, very profitable business)

What makes JDate particularly attractive

• 80% come to the site organically (word of mouth referrals and high winback rates)
• Spends only 33% of the industry avg in marketing (6-7% vs. 20%+)
• 13 years in business…. it dominates the Jewish dating market in major metropolitan cities in US.
• 1/3 of members make over $100K, 2/3 make over $55K
• 45% of graduate degrees
• 94% of subscribers have college degrees
• 55% women 45% men
• 90-93% contribution margins = revenue less marketing

Two recent events highlight JDate’s value. First, Great Hill Partners (GHP), a private equity firm which owns 44% of the shares outstanding, recently offered to take the company private at $3.10/share, which represented a small premium to the existing price. Several big stakeholders, notably Osmium Partners, came out and urged the special committee to vote against the takeover, as they valued the company at $6-7 per share. The bid was rejected unanimously from the special committee, and they hired Piper Jaffray to “pursue other strategic alternatives.” In essence, I think that there is a good chance that we will see a higher offer— either from Great Hill Partners or even one of the bigger online dating services such as Match.com, which would then dominate the niche dating area. Online dating is highly scalable, and at its current valuation, Spark Networks would be a steal for one of the bigger online dating players.

Secondly, their most recent quarter really shows the true turnaround in the company. JDate.com is where the majority of their value comes from and recently they have been “running off” their general dating sites, such as americansingles.com because it’s simply too competitive a space. Their real advantage is in the niche dating sites such as Jdate. The run-off is nearly complete, and despite losing over 10,000 subscribers in the general market segment as part of this run-off, they actually had a net gain in subscribers with strong growth from JDate and their other affinity networks in Q1 2010.

The numbers compare Q1 2010 with Q1 2009:

When valuing Spark Networks, the three key variables are obviously subscriber growth, average revenue/user (ARPU), and operating margins. Since I have already indicated why I think they have reached a bottom in subscriber numbers, let me give you my reasoning behind my growth assumptions.

I took a six year CAGR in subscriber numbers for JDate. While the other affinity segments are also important, JDate provides the most value. In addition, their growth tends to run very close with JDate. Their six year CAGR in subscribers is 3.54%.

I believe that we will see higher than 3.5% growth going forward for two reasons. First, the past few years have been particularly tough for the financial sector (NYC), which has hurt their prospective Jewish member base harder than most. Secondly, with the run-off of their general market networks, the company can now solely focus on managing their affinity networks, which should lead to improved results.

Industry estimates expect online dating to increase about 15%/annum for the next five years. However, my assumptions are much more conservative than that. In my most conservative scenario, I go ahead and model out 3.5% subscriber growth for the ten year model. Again, I think this is a very conservative assumption, but my research has led me to believe that niche dating sites will experience steadier and slower growth than the big players (Match.com and eHarmony).

A good sanity check for these subscriber assumptions can be seen by looking at what percentage of Jewish singles you expect to be JDate subscribers. There are 1.8 million Jewish singles in the U.S. Currently there are over 86,000 subscribers, which represents 4.7% of the entire U.S. Jewish singles market. If we assume that 55% (their current mix) of subscribers in year 10 will be attributed to Jdate, then they will have captured 7% of the market, which seems very reasonable given their current dominance.

Then the question of ARPU comes into play. This is the most difficult to model because it is tough to say how management will play this card because they could certainly slash ARPU to try and accelerate growth. However, given my ultra-conservative subscriber growth estimates, I feel comfortable leaving ARPU steady at 2009 figures ($290/year). Note that this averages to $24/month, which is still considerably less than Match.com ($30/month), and eHarmony ($60/month). You could potentially take issue with my ARPU stance because their latest quarter ARPU dropped to around $247/year on average, but I think is more of a temporary mix in subscriber preferences. If you do believe ARPU will go down, I think you have to believe in higher subscriber growth, which in the models I have created tend to cancel each other. Therefore, in my model below, I keep ARPU steady at 2009 numbers of $290/year. This just leaves one more key assumption: operating margins.

Spark’s operating margins have fluctuated from 17% to 20% over the past few years. With their run-off of their general market segment, they should experience considerable margin improvement since the general market segment experienced much worse ROI due to increased competition. I model operating margins gradually improving from 17% to 20% by the end of the ten year DCF. This would put them right around the industry average. Again, I feel like this is very conservative because 1) JDate is such a dominant brand and 2) they are still building out some of their other affinity networks, and as they start to let some of the less successful ones run-off, it will help tick margins higher.

Then, with an 11% Discount Rate, net capex of zero, their negative working capital benefit, a 3% terminal rate, and their net cash, my most conservative DCF model still values them at $4.21, which is 21% above the current market price.

So there you have it. An excellent business that has downside protection ($3.10/share offer from GHP), a strong likelihood for a higher offer, and is 21% undervalued even using my most conservative estimates. I actually believe shares are worth closer to $6, and that the current price represents little downside risk, but huge upside.

Regards,

Connor Haley

Disclosure: At the time of writing, Connor Haley owned shares of Spark Networks (LOV).

Reminder: By accepting our terms of service, you acknowledged your understanding that no content published as part of this service constitutes a recommendation for any particular investment, security, portfolio of securities, transaction or investment strategy for any specific person. You further understand that none of the creators of our Services or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of the Services may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Everyone knows about Google. It’s very name has become synonymous with internet searching. There is no denying that this $150 billion internet titan has been one of the great corporate success stories of our generation, but here at the College Edge, we don’t care where a company has been. We care about where it is going. And it isn’t often you see a giant like Google poised to continue its rapid growth, but Google is, simply, special.

The Business

Google’s business model is one of the most effective and ingenious that I’ve ever seen. A large majority of their revenues come from ad placement. Whenever you Google something, many sponsored links appear on the results. These sponsored links appear because Google auctions off these spaces for different keywords that searchers type. This is a dream for companies looking to advertise on the internet- it’s simple, it’s targeted, and it’s easy to track results. And Google’s superior algorithms have made it far and away the dominant search engine of the internet: 60% of all searches go through Google, more than Yahoo! and Microsoft’s Bing combined! And this is where Google’s real competitive advantage comes from. With all these searches flooding through Google’s search engine, the company has more data available to analyze than any other company out there. This then allows Google to stay ahead of the competition, which then enables it to collect even more data, resulting in the virtuous circle that has made Google the industry titan it is today, and that I think will continue to keep Google the king of the internet.

So much for Google’s central business. What about the new developments that will grow Google in the years to come. How about mobile advertising? It’s not a huge secret that Google and Apple are in a war for the potentially huge flood of revenue that could come from control of mobile search. Apple’s weapon is its immensely popular iPhone, and Google is fighting back with its up and coming Android operating system. And, as we know at CollegeStockPicks.com, there simply is no more important knowledge about a company than firsthand experience with its product. That’s where the value of the CSP forum comes in. One of our Top Posters, PDifiore, had this to say:

“ANDROID WILL WIN the smartphone market, Sorry but one company, even if it is Apple, cannot possibly fend off an army of smartphones, powered by Android and from all different providers, hitting the market as we speak. The Droid [is] Incredible, the EVO 4G, and the Nexus One alone make a formidable Android team. The possibilities are greater with Android than with iOS simply because of the fact that Android is customizable and flexible where Apple is, well, Apple. Even if iPhone has the upper hand now, it will be outstripped, as every new technology is at some point.”

Sometimes, it’s simple, firsthand testimony like this that uncovers the most brilliant investment ideas.

The Management

Google’s top management consists of a triumvirate of the two cofounders Larry Page and Sergry Brin along with the Chairman and CEO Eric Schmidt. These three men have run the company together since 2001, and show no signs of letting up anytime soon. I think it’s safe to assume that Google’s founders know as much as can be known about their own company, and Mr. Schmidt, an almost 30 year technology veteran, has been running Google for nearly a decade now. They own a combined 21% stake in the company, closely aligning their own interests with those of their other shareholders. That plus their 16.5% return on equity per year since Google’s IPO earns this management team a pass with flying colors from CSP.

The Price

Now HERE’s why I’m really excited about this stock. Google has always been an amazing company, but it always used to trade at very optimistic valuations. But Google’s recent run-down, possibly fueled by China fears and economic worries, has brought its valuation back down to earth. Google currently trades at a very reasonable price/Free Cash Flow ratio of 19, but what we really want to look at is the PEG, which currently stands at 1.1, which, for a company like Google, seems surprisingly low. I do not think that Google will have trouble meeting its growth estimates, and I would be willing to pay 2x that growth for a company like Google, the absolute, undisputed king of its industry.

The Safety Net

Our models currently have Google’s intrinsic value pegged around $720 per share. Shares are currently hovering around $490, giving investors over a 30% margin of safety! With numbers like that, it is hard to see much downside risk here.

The Execution

Google has just recently began to bounce-back from its multi-month slide, making it crucial to get into this stock before they run right back up again. These recent fears are a golden opportunity for the vigilant investor, one that you do not want to let pass you by. I am a buyer of Google right now, before the discount passes right by.

By Connor Haley with Sam Souryal

Disclosure: At the time of writing, Connor Haley owned shares of Google (GOOG).

Reminder: By accepting our terms of service, you have acknowledged your understanding that no content published as part of this service constitutes a recommendation for any particular investment, security, portfolio of securities, transaction or investment strategy for any specific person. You further understand that none of the creators of our Services or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of the Services may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

IMAX Corporation, which founded the motion picture format known as “IMAX”, officially began in 1967 and opened its first theater in 1970. The company is best known for its gigantic movie screens that average eight stories in height, 117.2 by 96.2 feet in dimension, totaling nearly 11,000 square feet in all. (Compare this to the typical movie screen size of about 70 by 30 feet.) Approximately a third of the company’s theaters fall into the “institutional” category, meaning the theaters are located in education-themed institutions (museums, parks, etc.). The rest of its theaters fit in the “commercial” category, which has featured commercial movies such as Dark Knight, Toy Story 3, and Avatar, among many others.

As of June 30, 2010, IMAX operated 325 commercial and 122 institutional theaters (totaling 447 theaters) in 47 countries around the world. This provides a stable international base of theaters for the company to build upon, and IMAX is rapidly expanding its “theater system signings” (meaning theaters that have been signed on to build). Through the first six months of 2010 IMAX signed contracts for 98 theater systems, nearly a 1000% increase from the 10 theater contracts the company signed in the first six months of 2009. To put it in perspective, the company signed more theater contracts in the second quarter of 2010 (57 contracts) than it did in the entire year of 2009 (35 contracts).

In July, IMAX CEO Richard Gelfond announced that management estimates the worldwide market potential for IMAX theaters to be closer to 1,250 than the previously expected 1,000. This expanded estimate represents approximately three times the amount of theaters the company currently operates; it’s safe to say that management is quite optimistic. A large portion of this growth is expected to take place in emerging markets such as China. In fact, on September 21, 2010 IMAX signed its largest Asia contract to build 15 new theaters in China. IMAX has a grand total of 96 theaters planned to be built in China, so you can see that this is becoming a major worldwide attraction.

Of course, any business can rapidly expand, the question is whether or not a business can expand in a sustainable and profitable manner. As can be common with many young and growing businesses, IMAX had its fair share of trouble during the middle  part of this past decade. Between 2006 and 2008 the company reported net losses, negative cash flow production, and managed to accumulate $180 million in long-term debt. In an effort to cut costs and expand profits, during these years the company began transitioning to the digital format in existing and planned theaters, which played a big role in its return to profitability in 2009. By the end of 2009 all long-term debt had been paid off and the company remains free of long-term debt today. IMAX holds a total of $37.01 million in cash as well, more than it ever had between 2006 and 2008.

In the first two quarters of 2010 management paid off $20.15 million in short-term debt while the company generated $39.12 million in cash flow. During the same period IMAX earned $39.88 million in profits and $128.38 million in revenue. This represents a profit margin of 31.06%, a major improvement from the 2.09% profit margin in 2009.

Let’s remember that this is still a relatively small business that is rapidly expanding in many countries around the world. I find it highly impressive that the company is expanding at record levels, generating high levels of cash flow, and all long-term debt has been eliminated. The financials of IMAX are becoming rock solid in 2010, and if management continues at this pace the company will be in a strong global position for the long haul. Any business that can expand itself without loading itself in debt is a business worth noting.

What I find especially unique about IMAX is that it has opportunities both in North America and in the developing economies of the world. People of all backgrounds will enjoy a good movie experience, and IMAX has thus far proven to be the leader in providing breathtaking theater experiences with groundbreaking digital technology. A huge plus for the business is that there are no major competitors challenging IMAX’s market, which likely explains why the company has already rooted itself in 47 countries. As wealth in developing economies continues to increase, more people will find value in the special entertainment IMAX provides.

IMAX has an advantage over traditional theaters because it has more control over how it can market movies. People go to IMAX for “the IMAX experience” whether it be with a documentary or a 3D action flick. Smaller theaters can’t attract audiences in the same way. IMAX is doing to the theater industry what Netflix has done to the home entertainment sector: providing a name brand service that is so unique, recognizable, and well-managed that it will be extremely difficult for other businesses to compete. IMAX is creating its own niche in the theater business.

IMAX’s global shift and growing name has largely been a product of CEO Richard Gelfond, who bought IMAX in 1994 with Bradley Weschler (current IMAX Chairman). When Gelfond acquired the business, IMAX was only used in museums and not for commercial movies. When asked to see 2001: A Space Odyssey on an IMAX screen, Gelfond proclaimed, “We have to figure out a way to do that!”

Because digital technology is beginning to catch up to the ideas Gelfond has had since 1994, IMAX has been able to expand its commercial movie offerings with wonderful success. Gelfond has also headed up a major effort to slash costs; by 2005 IMAX developed a lower cost theater system that could be installed into an existing multiplex (rather than constructing a brand new multiplex), saving the company 70% in expenses. (Prior to this approximately $5 million was needed to build an IMAX theater, with the new system about $1.5 million.)

IMAX is transitioning from its status as a small business based only in certain movie markets to a global competitor changing the ways people see movies. Personally, Avatar presented in IMAX 3D tops my list of most memorable movie experiences. In the remainder of 2010 and 2011 IMAX will be showcasing Harry Potter, The Green Hornet, Pirates of the Caribbean 4, with a variety of many others. I see bright prospects for IMAX even in a shaky economic setting because it is led by a creative and inventive management team, has growing financial stability and opportunity, and the company is quickly picking up contracts to build new theaters around the world. With a reasonable P/E ratio of 25, I believe the stock is at reasonable levels for patient investors focused on the long-term prospects of this blooming business. It won’t be long before everyone is talking about “the IMAX experience.”

By David Kretzmann

Disclosure: At the time of writing, David Kretzmann owned shares of IMAX (IMAX).

Reminder: By accepting our terms of service, you have acknowledged your understanding that no content published as part of this service constitutes a recommendation for any particular investment, security, portfolio of securities, transaction or investment strategy for any specific person. You further understand that none of the creators of our Services or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular investment, security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of the Services may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

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