Michael Moe - Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow

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PORTFOLIO

FINDING THE NEXT STARBUCKS

Michael Moe, CFA, is the co-founder, chairman, and CEO of ThinkEquity Partners L.L.C., and was formerly director of global growth stock research at Merrill Lynch. He has been named to Institutional Investors All American research team and has been awarded Best on the Street by the Wall Street Journal. Quoted regularly by national publications, he is a frequent guest on CNBC and CNN. He lives in San Francisco.

FINDING THE NEXT STARBUCKS

How to Identify

and Invest

in the Hot Stocks

of Tomorrow

MICHAEL MOE

PORTFOLIO
Published by the Penguin Group
Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St Stephens Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Group (Australia), 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa

Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England

First published in the United States of America by Portfolio, a member of Penguin Group (USA) Inc. 2006 This paperback edition published 2007

Copyright Michael Moe, 2006
All rights reserved

Excerpt from Jerry Maguire TriStar Pictures, Inc., 1996
All rights reserved. Courtesy of Sony Pictures Entertainment

Publishers Note:
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If you require financial advice or other expert assistance, you should seek the services of a competent professional.

THE LIBRARY OF CONGRESS CATALOGED THE HARDCOVER EDITION AS FOLLOWS: Moe, Michael.

Finding the next Starbucks: how to identify and invest in the hot stocks of tomorrow / Michael Moe.
p. cm.
Includes index.
ISBN: 978-1-1012-1641-5
1. StocksUnited States. 2. InvestmentsUnited States. 3. Investment analysisUnited
States. I. Title.
HG4910.M64 2006
332.63'220973dc22 2006049814

Except in the United States of America, this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publishers prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser.

The scanning, uploading and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law. Please purchase only authorized electronic editions and do not participate in or encourage electronic piracy of copyrighted materials. Your support of the authors rights is appreciated.

To my wonderful and loving family: my wife, Bonnie; my girls, Maggie and Caroline; my mother, Marcia; my father, Tom; my stepmother, Karen; my brothers, Mark and Tommy; my sisters, Laura, Jamie, Jennie, Aimee, and Jackie; and to my extended family at ThinkEquity Partners, all of whom have contributed to this effort in immeasurable ways.

CONTENTS

INTRODUCTION

G ROWING UP , I was obsessed with sportsboth playing and watching. I knew every obscure fact and statistic for my teamsthe Vikings, the Twins, and especially the University of Minnesota Golden Gophers.

As a kid, I was around business a lot because my dad was a successful corporate attorney who constantly had clients coming over to our house to work on deals at our kitchen table and calling at all hours of the night. Additionally, both my grandfathers, whom I adored, were accomplished senior business executives and active investors. But business and investing were of little interest to megive me the sports page.

In life you have these Aha! moments that are extremely impactful, maybe like the first time you met your spouse. You remember the time, place, and date as if it was yesterday, even if it was twenty years ago. An Aha! moment happened for me at the University of Minnesota, where I majored in political science and economics, thinking I would be a lawyer like my dad, but my real major was as a very backup quarterback for the football team.

When I was a senior, a friend of my dads took me to lunch and asked me if I ever thought of working on Wall Street. At the time, I thought the Federal Reserve was an Indian reservation. He gave me examples of how very small investments in companies like Control Data, Medtronic, and 3M turned into very large sums of money based on the success of those companies.

Seeing I was interested, he explained how the magic of compound interest works over time and the Rule of 72. I couldnt believe how amazing it was. I was hooked and found a new passion. Out with Sports Illustrated , in with the Wall Street Journal .

I wrote this book to share what I have learned over the past 20 years about how to identify and invest in the small companies that can become big companieswhat I call the stars of tomorrow. The hunt for these companies has the greatest potential for reward, but can also be very dangerous for the ill-prepared.

In reality, finding the best stocks is really finding the best companiesover time a stocks performance will be aligned with how the company does. Great companies and investors are both systematic and strategic to achieve their obejectives. The framework I provide in this book with our growth-investing 10 commandments, the four Ps for every great growth company (people, product, potential, and predictability), and sources to use to spot these companies early is a guide to finding tomorrows ten baggers.

I am honored that one of my investment heroes, Peter Lynch, reviewed Finding the Next Starbucks and gave me some practical input to making it clearer and better. An analogy he used to describe the purpose of the book is that of a ski instructor. With a couple of lessons, you cant expect to be an expert, but you will learn some important fundamentals and also some strategy for not getting hurt. This book is meant to be a guide that will help you with both.

You dont have to be the next Warren Buffett or Peter Lynch to find the next Starbucks, Google, or Amgen, but you do need the right fundamentals, which I hope youll find here.

Star SearchFinding the Supernovas

Personally, I hope to find the next Siegfried and Roy.

S IMON C OWELL , A MERICAN I DOL

I WAS FORTUNATE to be one of the first research analysts to identify Starbucks Coffee as a huge opportunity following its IPO in 1992, when its market cap (share price multiplied by number of shares outstanding) was $220 million. Today, its market cap is $23 billion.

I was also one of the first research analysts to follow and recommend Apollo Group after it went public in December 1994, with a $110 million market cap. Apollo was the top-performing stock out of all U.S. publicly traded companies from 1994 to 2004. A dollar invested in APOL at its initial public offering (IPO) is worth $83 today.

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