Why is the little guy important, the little guy I am referring to is small businesses
As per the Chamber of Commerce for 2022, the number of employees in small businesses in the US hit 61.7 million. This means that small business employees make up 46.4% of the total number of US employees. Over 8 out of 10 small businesses have no additional employees other than the proprietor. More to the point out of 33.2 million small businesses, 27.1 million are run by a single owner. Just 16% have 1 to 19 employees, and of those 33.2 million businesses only 650K have between 20 and 499 people working there.
The point is that this is a potent sector that has the potential to have recurring and loyal customers as bigger businesses. I can confidently project that this cohort consumes 10s of billions of dollars in cloud-based business services. It’s also no big secret that tech-adjacent services is the hottest growth engine in the USA. However, in the B2B sector, the long-tail of the addressable market of a single proprietor to 20 employees is often overlooked. Innovators that use the cloud to provide vital services can scale revenues in the billions and that is what I want to highlight. Moreover, many of these companies with strong marketing and technical moats sold off in Q3 and are presenting an opportunity to create alpha for nimble investors.
Here’s my list of stocks in the service of the little guy
Namely, I want to focus on Bill.com (BILL), DocuSign (DOCU), Intuit (INTU), LegalZoom (LZ), and Zoom (ZM) – the filter for surfacing these names is that I’ve used all these services in operating several different services businesses over the last 8 to 10 years. Also, I am a long-term investor in all these names except LZ but I already put in a market order to buy a few shares to start a position in LZ for tomorrow. I think these names should follow the strong seasonal year-end rally. While I am a long-term investor in all these names except one which turns out to be part of a larger very interesting story. More specifically LegalZoom is not currently a long-term investment. You will learn more about an interesting back story if you read further on. What I want to mention here, and I am editing this paragraph with this new information in mind, is that this article like everything I write for Seeking Alpha is in a memoir style. I usually write about the macroeconomy and how it will affect the stock market in the coming week. As part of that, I usually include stock trades that I made the prior week and they are usually congruent with my projection of market direction. On Sunday night’s article and this current one, I have decided to focus on tech-adjacent groups that are starting to move up with the overall market.
The stock market wants to go higher, especially the biggest capitalized stocks
It doesn’t take a genius to see that the current macro is very conducive for stocks. Interest rates have receded from new highs, growth statistics are moderating which is being taken as a positive, and the debt markets seem to reflect that the Fed is going to cut rates in the first half of ’24. So now with the accepted wisdom to be all bulled up, I think it makes sense to just surface stocks that should play catch up to the “Magnificent 7”. So this list is the next grouping that should generate some really good alpha by mid-January. After that, all bets are off, which I will likely give an update on this Sunday. Oh, I missed my point, the discovery of a really interesting backstory in one of the stocks mentioned below, was truly happenstance and is not a literary device. I really did not know the details before I dug a bit deeper during this article’s composition. I think it gives another angle on what a stock picker does, and I encourage you all to do it. If you put in a little effort you might uncover useful information that will get a leg up on the average investor. Really though it would bug me to think that in reading this, I used some cheap device to sound clever. Okay so below are stocks that I think should be long-term investments but should also move up along with the rise in the Nasdaq and S&P 500. Therefore if the Russell index – the RUT is starting to do well, then these names should do great as the RUT is the proxy for small business. We have seen a rebound in the RUT now that interest rates have not only stopped going up but also retreated moderately from over 5%.
Here are the essential names for small business
One could say that in addition to INTU; BILL, DOCU, LZ and ZM are must-haves especially if these businesses are active in business-to-business services, construction, or manufacturing sectors. These are the stocks of companies small businesses can’t live without.
Bill.com (BILL) – As a user of $BILL, to be able to electronically bill/invoice a customer and then get the payment automatically deposited to a business checking account is a very powerful connection. Also, automating all of the reminders and managing the vendor relationship for not only receivables but also payables. I was an enthused user of this product, so I understand the attractiveness of handling what can be a fraught exercise of getting that check and not being told instead; “the check is in the mail”. Also, when I was a user of Bill.com they offered me very reasonable interest rates on a business loan. I didn’t take them up on it, but the idea was intriguing. I don’t know how big this business is, but the elevated rates now, and AI observing my transactions make it easy to offer loans. I have the potential to be a great growth driver. I have long-term shares in this name. The point of this article is to point out where this stock could go. I readily admit that some of my initial shares are now way underwater, the current price is $63.62 and the 52WH is a whopping 139.50. The Yahoo Finance 1-year average price target is $82 that’s a 23% upside.
DocuSign (DOCU) I was a customer of DocuSign in signing and having others sign agreements. As most business people getting agreements signed is a fraught process. The ability to transmit documents and sign them electronically has been a huge productivity tool. Recently DOCU announced an electronic notary service. This is not just an electronic signature company, though this was their start. I can see all kinds of ways to expand their services to current customers. Contract Lifecycle Management (CLM), which automates workflows across the entire agreement process; and Gen for Salesforce, which allows sales representatives to automatically generate agreements with a few clicks from within Salesforce. DOCU currently trades at $42.26 with a 52WH $69.45 Yahoo Finance 1 Year average price target of $63.94 which is a 34% upside.
Intuit (INTU) While INTU is likely the name that sticks out here as a large-cap, its bread and butter is to single operators on up to small businesses. As such, INTU should follow the RUT even higher going into year-end., small business prospects begin to improve the most when interest rates retreat which is where interest rates are going. Nearly anyone who has a going concern uses Turbotax, and Quicken bookkeeping software. I of course used it all throughout my years in various businesses. I am not providing a big value add here but felt it belonged so intrinsically that to leave it out would raise questions. I happily own it at a much lower cost basis than what it is trading at now. However, if I saw a good entry point for a trade going into a year-end rally I would not hesitate to trade it at the current level. It is trading at $564 and the 1 year Yahoo Finance estimated price target is $568.91.
LegalZoom (LZ) I don’t own shares in this name making it unique in this list. The reason why it is here is that I found it indispensable in starting/running my businesses. They were also a great service to setting up LLCs and doing the filings and paying filing fees and such. I admit I haven’t used them for a number of years, However, if there were a business that could blossom from the adoption of generative AI it would be a name like this. On the other hand, there are a ton of negatives… One insider sold $382.5M over the last 3 months and short interest is 5.38% of the total float. The PE is a whopping 228.65. I usually don’t count insider selling but this huge amount just since mid-September is a bit of a shock. Not only that but looking back to 2021 there hasn’t been one insider purchaser. On the positive side revenue growth is expected to be over 66%. Yahoo 1 year average price target is $14.64 that’s 23% of upside. The 52WH is $15.68. Zacks gives LZ a Rank of #1 (Strong Buy).
I just uncovered a fascinating story, talk about “burying the lede”! The huge selling just didn’t sit well with me, so I dug just a tiny bit deeper. Turns out that this insider has been on the LZ board for 9 years, and from my life experience he was probably an early series A venture investor. This gentleman is a partner of Permira a private equity firm that was just very recently in the news for leading a takeover offer along with Blackstone (BX) of Adevinta (OTCPK:ADEVF). So of course he has been selling LZ to participate in this new deal. An additional tidbit is that he has been with Permira for 14 years, and as I said the investment in LZ 9 years ago. So my conjecture is he invested in LZ along with Permira. This totally eliminates any concern about him vacating ownership to this degree. I see no news that this gentleman has left the board or if he still owns shares. If I can surface any kind of information that LZ is developing a ChatGPT-based contract customizer of some kind, I will be an aggressive long-term investor. In the company description they do offer personalized attorney, tax, and bookkeeping services At this point I am saying that LZ is definitely worth a nibble. As an aside this is what I love about stock picking, scratching the surface, and discovering something totally unexpected. I didn’t mention the executive’s name even though it is all public record and any of you can do your own sleuthing.
Zoom Tech (ZM) I admit that I use ZM interchangeably with Alphabet (GOOGL) Google Meet tool. That said ZM is doing fantastically well, but like Rodney Dangerfield, they get no respect. Fiscal third-quarter revenue grew 3.2% year over year, beating the 2% expectations. Adjusted earnings per share jumped 21%, exceeding the analysts’ estimate of -6.5%. The key performance that caught my eye was the enterprise business, which grew 7.5% year-over-year revenue to $660.6 million. Management raised its guidance for the top and bottom lines. Besides the video meeting service they continue to add capabilities, Zoom Phone. Zoom Scheduler, Contact Center (CRM), and Whiteboard (collaboration) have increased consumer loyalty, They continue to successfully innovate like the recent launch of the Zoom AI companion, which has been added to over 200,000 accounts in just a two-month span says the ZM CFO. The current price is $63.83 the 52WH is $85.13 and the 1-year Yahoo Finance estimated price target is $78.68 so only a 19% upside, see, no respect.
No disrespect to the other tech titans out there
Speaking of respect clearly, there are other more prominent names like Alphabet, Amazon (AMZN), and Meta Platforms (META) that many small businesses use for advertising but there isn’t much value added to bring in all the tech titans, even Adobe (ADBE) is obviously used by many independent content creators, in all kinds of small scale endeavors. I just feel that the size of firms that I am envisioning would not necessarily have creativity on staff. However, just like INTU, I don’t think I am bringing much value to talking about names everyone already loves. That said, some of my trades this week will surprise you.
My trades
First up is my short trade of Tesla (TSLA) after it broke above 240 again. I think the buzz coming this week of the official launch of the Cybertruck will give me another opportunity to play the downside, but I think it is likely that the name will reach 250 on the PR hype. I don’t want to get too much into the story, if you are a sentient being you know that the CEO has attracted a lot of negative attention, and the EV market while still growing has slowed that growth and there are other successful EV companies out there like Rivian (RIVN) of which I am a long-term shareholder of. I made a trade to get into Microsoft (MSFT) nearly at the top of the 52WH it was a Long Call Feb ’24 Exp at 380. It closed on Friday at $277.75 and broke above the previous 52WH at $379.79. After all the hullabaloo I think a lot of funds are going to want to be in this name by year-end so I think it should get above 400 fairly quickly. In my experience when big-cap names start to move they have overcome a lot of inertia and they should continue to move. Satya Nadella has played a masterful game and that ability will be amply rewarded. Add in the fact that MSFT likely has the only practical tool that uses ChatGPT and is creating revenue is extremely valuable in a market that is losing its collective mind over AI. I have a bunch of Palantir (PLTR) long calls out to March and I intend to add even more. It too is an easy-to-identify data and AI juggernaut, that just won a very hard-fought contract with the NHS. That is the UK national health system, and there were huge objections to the use of a software provider that is a lethal weapon. I am sure they tried to find any viable competitor that could do the job that PLTR was doing for them and they failed. I think PLTR will become a go-to stock when someone wants an easy-to-understand AI play.
Okay, that is enough of my trade secrets for now. Happy trading! Er, I meant Happy Thanksgiving!
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