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

Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow by Michael Moe, is a new book on investing in growth stocks. This weekend over few Starbucks lattes I finished reading this book. CANSLIM strategy retold is one line summary of this book.

The author describes in detail his firms methodology to identify and invest in stars of tomorrow- the fastest growing, most innovative companies in the world. The idea like in any growth investing is to find small, unknown company , young company, with lots of growth potential ahead of them. If you find and invest in such company early, you benefit when the company is discovered and the opportunity becomes widely recognised. The author gives examples of companies like Starbucks, Apollo Group, Dell, and so on to illustrate his point.

The central premise of the author based on his analysis of past data is that in the short run variety of factors influence stock price- geopolitical events, funds flow, interest rates and so on. But in the long run only one thing influences stock price- Earnings Growth.In the long run, a company's price will be 100% correlated with its earning growth. Earning growth drives stock price. That is the central message of the book.

One of the pitfalls of growth investing is for every Starbucks, you have 10 or even 1000 duds which do not live up to expectations. The author offers an elaborate methodology to try and identify such stocks. That is where the book varies a bit from the CANSLIM method popularised by William O'Neil. This is where the book also loses its focus and makes the CANSLIM method needlessly complicated.

Many of the items on the laundry list of checklist to find tomorrow's winners is nice sounding rhetorical word plays:
1 Be right on fundamentals
2 Be proactive, not reactive
3 Be rigorous , but do not have rigor mortis
4 When wrong, admit it
5 The cockroach theory
6 Investment ideas are about information and insight
7 4 P (people, product, potential and predictability
8 Use 5 independent sources for each stock you invest in
9 Find 3 main reason for a stock to move up or down
10 Be passionate about investing, but dispassionate about the investment

Many of these things sound nice but are not really actionable. To further complicate the effort, the author proposes a framework for identifying megatrends. Hind sight is a very wonderful thing and the 8 megatrends identified by the author suffer from this bias. It is very easy to identify megatrends after the fact. Plus the question to be asked is , is it at all necessary. If earnings drive price then that is what you should track. A large part of the book is devoted to these megatrends.

All in all the book basically is a variation of the CANSLIM style investing concept. It tries to improve on it and in the process makes it more complicated. The book would have benefited a lot from good editing to make it crisper.

If you want to learn growth investing stick to William O'Neil methodology. If you want a better insight in to growth investing read :
Frank Cappiello's New Guide to Finding the Next Superstock
Superperformance stocks
The Hedge Fund Edge

Save your money, don't buy this book. The book vividly demonstrates the temptation to complicate simple things. The cover is good and also the latte at the Starbucks was excellent.

The market is not doing much, so let me grab another latte and a book by my favorite author- Memories of My Melancholy Whores