Lately, I’ve been inspired by Howard Marks and his wonderful book: “The Most Important Thing.” In it, the famed investor discusses the importance of “2nd level thinking,” the ability to think differently than the market to find trends.
This type of thinking is essential in finding the mega trends of tomorrow, today; which is the stated goal of this investor and should be yours too. Doing so, allows us to be big winners without picking the perfect stock (think “internet” in 95’).
Second level thinking starts with a simple question: what will tomorrow look like?
Here’s a funny and mistaken first level though, followed by its more astute 2nd level counterpart.
1st level: Linkedin Corporation (NYSE:LNKD) is an overvalued “social media” site. With a forward P/E of 76.78, it’s likely that this fad stock will come crashing down soon.
LinkedIn’s biggest opportunity lies in the growth of an opportunity few see. They will eventually fully exploit it and the multiple will shrink.
The LinkedIn opportunity I’m bullish on is their involvement with the recruitment services sector, yep—7% unemployment and all.
Prior to the recession of 2007 businesses feared a coming skilled labor shortage, as the baby boomers set to retire all while the world was becoming less skilled. Even with 7% unemployment, did you know that 60% of U.S. companies reported an inability to fill open positions last year?
Almost all employers in the survey reported a lack of “hard skills” or education as the reason for their vacancy. A Pharmacist or an Engineer for instance are currently experiencing unemployment rates below 3%, above full employment levels. The skilled labor shortage is here, and will accelerate in years to come.
*sources Wall Street Journal and Reuters
That’s where LinkedIn comes in
On the heels of yet another, blowout quarter with earnings coming in at .35c/share (vs. .19 expected), the stock has soared over 20%.
While their marketing solutions business was up 68% and premium subscriptions were up a staggering 79%, recruiting presents the best growth catalyst.
LinkedIn has been at a bit of a crossroads with its recruiting services. The company offers services that are essential in bringing headhunters and skilled candidates together, but they don’t always see the fruit of their labor.
That’s because recruiters are currently able to post jobs in targeted, candidate specific groups for free; this creates a drag on revenue that should go to LinkedIn’s general job board. These postings, are far more expensive than most LinkedIn products so it’s vital they do not continue to let this cash slip away.
So why am I bullish on LinkedIn recruiting? Well, despite their “job posting woes” LNKD’s recruiting service revenues still rose a staggering 90%. The primary reason was price increases for recruiting software tools, which had previously been a concern.
This progression gives me faith that, at some point, LinkedIn will start charging users at least a nominal fee for the job postings that go in “groups” sections. Any improvement in this area, coupled with the fact that LinkedIn has no real recruiting competitors for its other recruiting services could send the stock to another level.