Joel Litman recently released a presentation with a header that reads: America’s Top ‘Stock Cop’ Warns: “Do This BEFORE You Get the Vaccine”
While that statement sounds like it has something to do with a health warning about the vaccine, he is instead referring to how the vaccine will affect some stocks.
In this article, I give you an overview of the presentation and reveal the names and ticker symbols he was teasing to let you decide what you’ll make of his advice.
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What is LOCK System?
The LOCK System is a proprietary technique that Joel Litman uses to analyze the stock market. In the presentation, he claims that money managers use his research to make decisions – insights he gleans from the LOCK system.
To understand how the LOCK system works, you need some background.
Joel Litman believes that the stock market will be affected by the vaccine rollout. As people get vaccinated and we overcome the virus, he expects the stock market to shift.
But not all stocks will be affected the same way – some will flourish as others plummet. Therefore, he wants you to prepare for this shift by investing in the ones that are likely to do well and shun the ones that are likely to fail.
And that’s where his LOCK System comes in. Here he is explaining its utility:
“So how do you know which tech companies are just Covid fads?
And which will rule the post-Covid world?
That’s where I come in…
I’ve created a system – what I call the L.O.C.K. system – that separates the winners from the losers.
It’s like having an X-ray view into company operations. You’ll be able to determine how they really feel, behind closed doors.
I even developed a proprietary technology to decipher changes in pitch in the CEO’s voice during quarterly earnings calls.
This machine allows my firm to determine whether a CEO is feigning confidence and hiding skepticism. Or if they believe the story they’re telling.”
It is a stock-picking system that enables him to separate the wheat from the chaff, so to speak.
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How does the LOCK System Work?
To help us understand how the LOCK System works, Litman tells us that he uses his skills as a forensic accountant to subject companies to higher bookkeeping standards.
“A forensic accountant can’t just accept numbers on their surface…
You have to prove discrepancies beyond a shadow of a doubt.
What does that have to do with the stock market?
Well, I’ve identified over 130 flaws and discrepancies in the general accounting standards used to keep the books of most American corporations.
These are the same numbers that are fed to the so-called experts.
But when you apply my specific accounting principles, correcting these 130 flaws…
The numbers – and the outlook for the stock – can change drastically.”
So what he is saying is that the Generally Accepted Accounting Principles (GAAP) are flawed and his LOCK System has already identified 130 flaws and discrepancies that hide the true financial health of the companies he examines.
L.O.C.K is an acronym for:
- L With his higher standards, he locates companies that are overvalued or undervalued due to the accounting discrepancies that aren’t caught by the GAAP rule. He avoids the overvalued ones and retains the undervalued ones for further analysis.
- O When he narrows the list down to 30-200 companies, he examines their operations. With the help of a team of over 100 accountants and analysts, he examines the remaining companies’ leadership, long-term strategy, and growth potential.
- C He analyzes the CEO’s conference calls as they talk about quarterly earnings using a lie-detector-like system called an electro-audiogram (EAG). It analyzes the CEO’s pitch and voice patterns to determine whether they believe what they are saying. If they are confident, he knows that it is a good investment and when they aren’t he takes that as a sign of trouble.
- Kick it or Keep it. Litman then decides which stocks he will recommend and which ones he will shun.
In the presentation, he says that he has identified three pandemic trends that will persist beyond the pandemic and the companies you should consider adding to your portfolio from each trend.
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What companies has the LOCK System identified as winners?
Litman says that some stay-at-home stocks will persevere beyond the pandemic. In his own words:
“I put every stock in the market through L.O.C.K. once a week.
And last week, I found a few surprises.
Some of the most popular “stay-at-home” stocks are on the verge of ruin.
And quite a few under-the-radar companies are poised to become big winners in the post-Covid world.
It all centers around a vaccine. And the huge money shift that will take place as a result.
The sooner Covid-19 is snuffed out – the sooner these companies will crash.
And by that time, the new tech giants I’ll tell you about today – will likely be far more expensive.”
He wants you to consider investing in these “new tech giants” while they are still on the ground floor. So, what trends and stocks is he talking about?
Enduring Habit #1: Online retail
When the pandemic hit in 2020, governments enforced strict lockdown protocols and, as a result, more people shopped online. Amazon, for example, performed particularly well.
He says that online shopping will remain trendy but he wants you to stay away from a few companies that his LOCK System has deemed problematic. He wants you to avoid Door Dash (DASH), UPS (UPS), FedEx (FDS), and Domino’s Pizza (DPZ).
His main reason for blacklisting them is that they don’t have sustainable cash flow.
On to the companies with his approval:
He recommends a company that is offering remote payment infrastructure:
“And this company’s proprietary technology is at the heart of the remote payment business.
They’ve been around almost as long as the internet.
On average, their software handles 41.5 million transactions every single day.
That amounts to over $20 billion in remote payments every week.
8 in 10 online buyers use their technology – even if they don’t know it.”
And another that is offering cloud computing services:
“Right now, this second company is a one-stop shop for cloud computing, AI and data storage.
Making it massively important to the online shopping universe.
Apple pays them $30 million a month to run its massive cloud.
Netflix paid $19 million a month during the pandemic to keep its streaming service up and running.
Facebook forks over $11 million every month…
Over 100,000 companies as diverse as ESPN, Pfizer, Zillow and McDonald’s would shut down without the company’s cloud services.”
He wrote a report about both of them called The Giants of Online Shopping.
The first company he is hinting at is probably Global Payments (GPN). It has been around for a long time and started as a credit card processing company – its durability fits the description of a company that has been around as long as the internet. It is a leading provider of payment technology and software solutions.
The second company he is teasing there is Amazon (AMZN) – he is not referring to its online retail. Instead, he is referring to its cloud computing service side of the business, Amazon Web Services, which is a market leader that boasts all those clients.
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Enduring Habit #2: Working from home
When the pandemic struck, most people were forced to work remotely because they couldn’t make it to go to their offices. Litman said this much when he released a presentation called Office Doomsday about the office going extinct.
He is right when he says that this trend will endure because companies like Ford have already decided to allow employees to carry on working remotely (partly or wholly) when the pandemic is over.
Before we get to his recommendations, he wants you to avoid Zoom Communications (ZM) because he thinks it is overvalued.
When it comes to the work-at-home trend, he favors companies providing internet services. He has identified three.
About the first one:
“A company who rakes in $38 billion a quarter from its multiple businesses. Its hands are in every aspect of the future of the internet, from cloud computing to Internet of Things, online video streaming and digital advertising.
Most importantly, they offer businesses a full suite of services – think Microsoft, Zoom and Slack all rolled into one.”
And the second one:
“This cloud storage company proved so popular with at-home workers that 1 in 5 used this service – even when it was banned by most corporate IT departments. L.O.C.K. sees huge upside in the future hybrid work environment as workers use its products at home and in the office.”
And the third one:
“The largest internet service provider in America with 26 million subscribers has huge room for growth throughout the country thanks to its proprietary high-speed internet technology.”
He wrote a report about them called The 3 Pillars of the Internet.
The first company he teases could be either Alphabet (GOOGL) or Microsoft (MSFT) but I will go with Alphabet because it has powerful video streaming (YouTube) and the digital advertising businesses. Its revenue quarterly revenue is in the $38 billion range although that fluctuates.
The second one is Dropbox (DBX) because it offers cloud storage. Although it is directly competing with Google and Microsoft, it is very popular with employees.
The third company is Charter Communications (CHTR), a telecommunications and mass media company that has a subscriber count in the neighborhood of 26 million in 41 states. It is the second-largest cable operator in the country; the largest is Comcast.
Enduring Habit #3: Entertainment has changed forever
Concerning entertainment, he has identified three companies in the streaming, home entertainment, and gaming industries.
He says that movie theaters will run out of business and streaming services will take over the movie industry and as people spend more time indoors, gaming will retain growth.
The first company he teases is in the streaming business:
“Revenue is $1.6 billion monthly…
They have one of the largest libraries of movies. And new, original content coming every month.
This up-and-comer has the highest rate of subscriber growth too… 22% year over year.
L.O.C.K. suggests they will dominate video streaming for the next decade and beyond.
This is perhaps the #1 tech stock in the market.”
The second one:
“This company is a play on both the home theater and public movie theaters.
You see, they’re a key player in how your movies sound.
On top of that, they own over 8,100 patents related to all types of advanced theater systems.
Even if you don’t buy their brand, you’re likely still paying them for their technology.
Revenues have cleared $1 billion in each of the last two years. And as long as people watch movies, this company will get paid.”
And a third one that is in the gaming industry:
“L.O.C.K. has unearthed one gaming company with room for massive growth going forward.
They’re a key player in the $175 billion a year gaming software industry.”
He has written a report about it called 3 High-Flying Home Entertainment Stocks to Buy Now.
The first company is Netflix (NFLX). It isn’t an up-and-comer since it is the leading streaming service and I suspect Litman just said that to throw us off the scent. However, it matches the description. For example, last year as the pandemic hit, its subscriber count grew by 22% year over year. It is also not unrealistic to say that it may dominate the video streaming market (although competitors are making ground).
The second company is Dolby (DLB). It specializes in audio noise reduction and audio encoding/compression. By and large, it licenses its tech to consumer electronics manufacturers and as of 2017, it had over 8,100 patents.
As for the gaming company he is hinting at, he doesn’t offer concrete clues so I couldn’t decipher it.
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Who is Joel Litman?
Joel Litman is an investment analyst and the chief investment strategist and founder of Altimetry, a boutique investment research firm that reminds me of Whitney Tilson’s Empire Financial Research in the way it operates.
On the company’s website, his profile says that he is the president and CEO of Valens Research and is on the board of COL Financial Group, a brokerage firm in Asia.
It also says that he is a professor and has taught or guest-lectured at Harvard Business School, University of Chicago Booth, Wharton, and other institutions.
He is a member of the CFA Institute and the Association of Certified Fraud Examiners. He is a CPA and has a BS in Accounting from DePaul University and an MBA/MM from the Kellogg Graduate School of Management at Northwestern University.
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What is Hidden Alpha? (The Newsletter)
Hidden Alpha is the advisory service through which Litman shares recommendations gleaned from the LOCK System. It is published by Altimetry.
When you sign up for the newsletter, you get:
- Free copies of each of the reports I’ve mentioned above. You even get a bonus one called The 14 Fad Stocks to Sell Before You Get the Vaccine that has the names of stay-at-home stocks that Litman expects to do badly post-pandemic.
- A free copy of a report called How to Be a Stock Cop: The Secrets of the L.O.C.K. System. In this one, Litman explains in greater detail how the LOCK System works.
- 12 monthly issues of the Hidden Alpha newsletter.
You also get access to archived special reports and recommendations.
How much do you pay to join Hidden Alpha?
A one-year subscription costs $49 if you join via the presentation.
Does Hidden Alpha have a Refund Policy?
You can cancel the subscription for a full refund within 60 days of joining.
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Closing Remarks on LOCK System
LOCK System is a toolset used by Joel Litman to analyze stocks by subjecting companies to forensic accounting standards. He says that it enables him to look past what he believes to be misleading financial reports that most companies release to the public.
In his pitch, he says that when the pandemic is gone, some companies that thrived during the pandemic will become relics of the past. However, some will endure and will make for good investment alternatives.
His recommendations are:
- Global Payments (GPN)
- Amazon (AMZN)
- Alphabet (GOOGL)
- Dropbox (DBX)
- Charter Communications (CHTR)
- Netflix (NFLX)
- Dolby (DB)
As you can see, these are all very large companies but Litman expects them to grow even bigger.
It all makes sense although you should be careful not to invest in his picks hoping to become rich off of them because he may be wrong; the market is always capable of springing surprises and no analyst is right all the time.
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