Acquity: The new age of advertising

by Timothy Lutts, editor Cabot Stock of the Month

Our latest featured recommendation Acquity Group (AQ) is an Internet stock that is growing very fast and has the opportunity to get far larger, which could prove very profitable to early shareholders.

Acquity does is serve as a consultant (somewhat like an advertising agency) for big companies looking for expert guidance on selling online, on mobile devices, through social networks and emerging media—basically the post-TV world.

Its top 10 clients in 2011 were Allstate, Motorola, Adobe, Belk, GM, American Express, Grainger, Discover, Pampered Chef and HTC.

Acquity not only designs digital marketing strategies for these companies, it also designs digital business strategies. From developing ad concepts to advising on hardware and software, Acquity has the resources to help with all stages of modern marketing.

Although its stock was recommended by our Cabot China & Emerging Markets Report, Acquity hardly seems like a foreign company. That’s true; headquarters are in Chicago and there are offices in nine other U.S. cities as well as one in Canada.

But there are two in China as well, and until it came public this year, Acquity was owned by a Chinese company run by George Lu, the China-born entrepreneur who founded the online auction site uBid.

Furthermore, Acquity has formed a joint venture with Li Ning Company, a Chinese sports apparel company that was founded by Olympic gymnastics gold medalist Li Ning, and is now the second largest sports shoe and clothing company in China.

The joint venture is aiming to become a U.S. brand as well. Going forward, we expect substantial growth in China, for both Li Ning and Acquity as a whole.

Fundamentally, the company’s numbers are impressive. Acquity lost money in 2009 and 2010, turned profitable in 2011, and is now focused on growing both revenues and earnings rapidly.

In the second quarter of 2012, revenues grew 43% from the year before, while earnings climbed 33%. Analysts expect 73% earnings growth this year and 35% in 2013.

Technically, AQ’s chart shows a short base at 6 after the May IPO, a quick run up to 9 at the end of the month, and then a slowing uptrend to a high of 10.75 in mid-August.

Since then it’s pulled back once, and now twice, to support at 9.5, telling us the majority of shareholders are happy to hold for bigger gains and also, that new investors are discovering this high-potential stock every day and liking what they see.

But there is a caution. AQ is not only young and low-priced, it is also thinly traded, with low institutional sponsorship. Thus it is possible  that the stock could collapse below support and quickly lose 20% or more of its value.

In such cases, it’s important to keep losses small. But we think the upside potential justifies the risk for a small part of your aggressive money, and that the current pullback presents a decent entry point.

Learn more about this financial newsletter at Timothy Lutts' Cabot Stock of the Month.

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