Tom Renna, founder of Equities Research, talks with Opportunist’s Managing Editor Leslie Stone about why he’s a big believer in crowdfunding, how Title III will open the door for everyday individuals to get involved in investment opportunities previously reserved for the wealthy and why he’s still bullish on America.
Tom Renna began his professional career on Wall Street 25 years ago after graduating Rutgers University. In 2005 he founded Equities Research LLC, a boutique investment research firm where he provides market research analysis and consulting services to both issuers (private and public) and Wall Street professionals. Drawing on his experience as an investment banker, financial advisor, institutional equity broker, bond broker, entrepreneur and director of a public company, he has made some of the top long and short calls over the last 25 years on Wall Street and his work has been mentioned on CNBC and other financial news sources. An original owner of Newsgrade Corp., a private online publishing company that annually generated millions of timely and actionable automated stories streaming on Bloomberg Terminals for institutional investors, by 1993 Renna had become managing director of national sales for Stockdiagnostics.com, a subsidiary of Newsgrade that he helped to create.
Today, Renna is anxiously awaiting passage of Title III of the JOBS (Jumpstart Our Business Startups) Act of 2012, which will make it possible for non-accredited investors—people with less than $1 million net worth—to invest and participate online in early-stage startup businesses and private companies. History was made last September when the Securities and Exchange Commission officially implemented Title II of the JOBS Act and opened the door for private startups and small businesses to publicly advertise their securities to accredited investors for the first time in 80 years. As one of the most anticipated elements of the JOBS Act, Title III will make it possible for everyday people to participate in investment opportunities previously reserved for the wealthy and give entrepreneurs more avenues in which to raise capital. “I’m waiting for Title III to pass so I will be able to service all these private companies and help individual investors take advantage of crowdfunding opportunities,” Renna says. “I’m really excited about the crowdfunding space. No matter your financial condition, you will have an opportunity. It’s going to be unbelievable.”
Opportunist: Why is Title III so important to crowdfunding and the startup community?
Tom Renna: Since 1933, there have been basically two ways for entrepreneurs to raise capital: borrow from traditional banks or go to Wall Street and sell stock in their company. And if someone wanted to invest in one of those companies they had to be an accredited investor. Let’s say in 1995 I came to you and asked if you were interested in investing in a new company called eBay that was doing online auctions and you said, ‘OK, I’ll buy $100 worth.’ I would have to ask if you were accredited, and if you said no my reply would be: ‘I’m sorry. Based on the S.E.C. Act of 1933, you’re not allowed to invest because you’re not suitable. Only people with lots of money are allowed to invest.’ If someone invested $10,000 back then and held on to it they would have $10 million today. If you missed out because you weren’t accredited, you’d probably ask ‘How come the rich guy got richer and I didn’t have an opportunity to do that?’ That’s why the JOBS Act came about and crowdfunding does what it does.
Opportunist: How can crowdfunding help the economy?
Tom Renna: The crowdfunding space is going to allow mom-and-pop entrepreneurs to go out and raise money to bring their ideas to market. For example, a stay-at-home mom somewhere in Nebraska who makes good chocolate chip cookies will be able to go out and raise herself $10,000 through a crowdfunding platform and start boxing her cookies and building her business. When I read the unemployment numbers or hear about people who are 40, 50 or 60 years old losing their jobs after working for decades at a company and not finding work, I understand that it’s not like it was 30 or 40 years ago when people retired at 62. People are living into their 80s—my dad will soon be 90—and they need to find something to do to survive and have income during their retirement. People are going to start doing things. People are retiring from General Motors and making bird houses in their garage.
Opportunist: What is your role in the crowdfunding space?
Tom Renna: A lot of people will need coaching. I get calls all the time. I spent close to three decades on Wall Street, working with issuers and investors, and I will be able to coach both sides and make a good living doing it. I looked at about 1,000 deals in 90 days and found four right now that are incredible. Finding four very special deals out of 1,000 is very hard to do. Anybody interested in hearing about some of these companies can contact me directly at firstname.lastname@example.org or subscribe to my service via my website.
Opportunist: Do you foresee any snags that may arise from opening this up after decades of restrictions?
Tom Renna: Litigation will likely be a problem. Lots of fraud comes out of this. People will say, ‘Hey, I’m going to open up 10 bakeries … come invest in me,’ and then they won’t open up the bakeries. It’s going to be like the Wild West for a while. That’s why they created these laws years ago, but Congress is taking its time and there will be disclosure laws.
Opportunist: Where can investors find legitimate opportunities?
Tom Renna: When everyday citizens want to invest in a company they’re going to find these companies through a website where there’s a crowd. Facebook has a crowd, and so does Google+ and YouTube and Yahoo. These platforms are going to put together private issuers trying to raise money on the debt and equity side. That’s where individual investors looking for specific companies to invest in are going to meet and it’s going to be an explosion as far as helping small entrepreneurs grow their business.
Opportunist: Tell us about Equities Research.
Tom Renna: Fundamental analysis is what I do. On the buy side, we focus on companies with sound growth, trading at a discount to cash flow. Overvalued stocks, with declining growth, trading at premiums to cash flow are flagged on the sell side. As long as companies continue to grow, fund top line sales, earnings and cash flow we will continue to hold those stocks. I am also involved with research for onlinefinancialsector.com, dynastywealth.com and seekingalpha.com.
Opportunist: Can you share a few of your success stories?
Tom Renna: About 18 months ago I came out with a short sale recommend on Titan Machinery (NASDAQ: TITN). The stock was at $30 and over the last 18 months it fell 40 percent to $12—at the same time the stock market went up over 10 percent. In a bull market it’s tough to seek alpha. I seek alpha and that’s what I did: I found alpha. Any stock you bought in the last 18 months went higher, so to find one that went lower is the reason people pay me the premium they pay me. There is no value added in giving somebody a winner when the markets are rising because that’s happening with pretty much whatever you buy.
I was bullish on Chipotle (NYSE: CMG) since 2008 when I recommended the stock at $50 a share, and I watched it go up to $440. Every 90 days I analyzed it based on fundamentals. Then, on the morning of April 20, 2012, I read the 10Q they had just filed and, sure enough, their operating cash flow numbers took a hit. So I contacted CNBC and Herb Greenburg, who had an analyst on the show at the time, mentioned my concerns on the air. Over the next 90 days Chipotle shares fell from $420 to below $300, and by October 2012 they fell to $234. It was one of the biggest winners on Wall Street, and I made that call. That’s the kind of customized research I do. I don’t always have a stock for everybody every day but when I find one people listen and they pay me.
Opportunist: What criteria do you look for in the companies you recommend or invest in?
Tom Renna: They have to be able to grow from zero to $100 million in revenues within five to seven years. I’m not looking for $5 million to $15 million over five years. Second, they must be in a multibillion-dollar industry. In other words, a $500 million industry doesn’t leave a lot of room for another company to enter that space and grow. They would have to take 20 percent of the market share. So I’d rather do business with a company in a $10 billion industry with plenty of room to grow. More room to grow means it doesn’t have to compete head-on with McDonald’s, Wendy’s, Chipotle or Domino’s. If a Mexican restaurant came out similar to Chipotle—they don’t even have to be as big—who cares as long as there’s room to grow. Third, they must have great management that has made an investment in the company. Lots of companies have great ideas but lack great management. I don’t want to buy stock in a company when management has no skin in the game.
Opportunist: Where should investors be putting their money right now?
Tom Renna: I look at in terms of building wealth versus making money. Most people are trying to make money but it is through long-term investing that you build wealth. Some investors have made as much as 100 or even 1,000 times their initial investment—those are the kinds of returns I call dynasty wealth—through long-term investments of buying and holding. The mistake that lots of people who are buying stocks make is to sell them at, say, $15 when that stock may have been a Buffalo Wild Wings [currently trading at $123.73]. As soon as the stock goes up, they sell and make a profit. Or, when the stock goes down, they buy or sell because it went down. It’s all emotion and that’s not the way to go about building wealth. Discipline and strategy are needed, but most people miss out on a huge long-term gain by trying to make a short-term profit—and they have to pay taxes on that profit as well. The power of buying, holding and accumulating a long-term position in a stock is how you build wealth.
Opportunist: Which market sectors do you consider the most promising?
Tom Renna: I’m bullish on social media and believe it will be the hottest sector for several years. The Global X Social Media ETF (SOCL), which consists of a basket of social media stocks such as Facebook, LinkedIn, Yelp, Zillow, Groupon, Pandora, Shutterfly and top sites like Google and Yahoo, is definitely a place to invest your money. It’s just under $20 a share and every investor should own it because it will be worth $100 a share in five years.
SOCL is a great way to play the stock market. We buy every 90 days when they add more to their portfolio. Michael Markowski, the head of research at onlinefinancialsector.com, is a friend of mine. He has recommended these stocks for the last 18 months and I do the research for him.
Opportunist: How do you feel about Yo, the one-word messaging app that raised $1 million back in the summer?
Tom Renna: I think it’s a temporary fad that’s going to go away. Somebody like Google, Apple or Verizon will create their own or buy another one that is out there.
Opportunist: Now that the Fed is winding down its quantitative easing (QE) bond-buying program, will the stock market suffer any repercussions?
Tom Renna: I believe there will be a hiccup because they’re already factoring it in. So when it happens the economy will be rallied higher.
Opportunist: Do you believe the Fed will raise interest rates?
Tom Renna: I don’t think so. They don’t have a choice because if they do raise interest rates they will kill the real estate economy. If they kill real estate nobody is going to vote for any incumbent. Real estate is all people have. Their home is their nest egg. It’s their No. 1 retirement and investment.
Opportunist: What about the mid-term elections? Do you anticipate the results affecting the markets?
Tom Renna: No matter what the election results are, both parties are focused on keeping interest rates low. As long as interest rates stay low, the economy will continue to chug along, real estate will continue to be competitive, construction will be fine and major corporations’ balance sheets will still be healthy. No one is going to try to hurt this economy.
Opportunist: What is your view on high-profile IPOS like Alibaba (NYSE: BABA)?
Tom Renna: I’m a long-term investor, so I don’t believe in the motion of hot IPOs and I don’t see any urgency in buying them. I recommended Yahoo at $17 a share two years ago. It was my No. 1 stock pick and that had a lot to do with assets held in Alibaba. My followers owned the stock at $17 a share and it went to over $40. For people who want to invest in Alibaba, I recommend they buy Yahoo (NASDAQ: YHOO). It’s like a proxy. I don’t believe you need to own a stock within the first 90 days of it being public.
Opportunist: Are you still bullish on America?
Tom Renna: Yes. I’m bullish on America for the next five to 10 years, and not only because of the JOBS Act. Balance sheets are healthy right now. Interest rates are very low. The real estate economy looks good. With interest rates as low as they are, mainstream America will get out of this recession through real estate and the construction industry and the mortgage end of this market. In other words, if interest rates were higher our economy would be in trouble with a direct effect on real estate. Real estate cannot afford for prices to go low or construction to get any weaker than it was. Those things would happen with interest rates higher.
Leslie Stone is an award-winning writer, editor with more than two decades of experience covering business, finance, real estate and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in Florida. Follow Leslie on Twitter: @lescstone.