Invest Like a Venture Capitalist With These 5 Stocks

BALTIMORE (Stockpickr) -- Venture capital investors are all about buying the deals that you can't get into -- so what does it mean when they own the ones that you can?

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Venture capitalists buy equity in early stage companies before they become public. Because they have access to more exclusive deals, VCs typically keep their money out of the public markets. After all, they're usually able to earn a much higher rate of return in their venture portfolios. Why would you buy Twitter (TWTR) today if you could have bought in three years ago?

But too many investors ignore the fact that many venture capital funds do own publicly traded stocks. Between private investments they've continued to hold onto after going public and new positions they've picked up on major exchanges, the biggest VCs currently hold a stock portfolio worth more than $1.2 billion today.

So if venture capital professionals are making big bets in public equity, investors had better pay attention. Thats why were taking a look at VCs five favorite stocks today.

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To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.

In total, approximately 3,400 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, thats not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. Thats all the more reason to crack open the moves being made with institutions $16.3 trillion under management.

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Today, well focus on five venture capital favorites from the last quarter.


First up is Facebook (FB). VCs love this social networking giant, and for good reason. For funds that entered positions in Facebook early, the IPO process brought in some windfall gains (even if share prices didn't cooperate immediately afterward). But what's notable now is the fact that venture funds are still holding onto many of their shares. The small sampling of VCs who posted their most recent 13Fs are still hanging onto more than $304 million worth of FB stock.

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That's good enough to make Facebook VCs' favorite stock right now.

Facebook is, simply put, the most popular Web site on the internet. People spend more time on the site than anywhere else online, and that fact carries a lot of value. Facebook also holds some of the most valuable demographic information on its users, a fact that dramatically increases the firm's ability to sell ultra-targeted ads at premium pricing.

In my view, Facebook's biggest problem is the fact that it still has to distract its userbase from friend-stalking in order to generate ad revenue. The firm has done a good job of fixing that in recent quarters, pushing gaming revenues and integrating marketplace efforts more naturally across the site, it's still an issue.

From a technical standpoint, shares have been looking "toppy" for a little while now. If shares can break out above $60, consider it a strong buy signal.

Tableau Software

Mid-cap analytics software maker Tableau Software (DATA) has had a good run since shares went public back in the summer, and the stock is up more than 40% since then. That likely has a lot to do with the fact that venture capital funds have decided to hold onto this stock into 2014. At last count, VCs own more than 3.25 million shares, worth $231 million.

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Tableau is in the business of helping its customers visualize their data in new ways. By introducing drag-and-drop simplicity to complex datasets, Tableau's solution lets users analyze information without the need for technical expertise. In a nutshell, DATA is the right stock at the right time; with buzzwords like "big data" popping up at every turn, companies generate and sift through more information than ever before. In order to monetize their reams of information, the numbers need to be crunched, and that puts a premium price tag on Tableau's offerings.

Approximately 70% of revenues come from software licenses at the moment, with the balance earned through services. Those sales numbers have been growing at a breakneck pace for the last five years, and profitability has been quicker than expected (even if margins remain slim). DATA isn't cheap, but the premium on shares looks justified right now.

Green Dot

Green Dot (GDOT) is another name that saw some stellar performance in 2013; shares of the small-cap financial firm have doubled in the last 12 months. Green Dot sells prepaid Visa (V) and MasterCard (MA) payment cards, which are available at more than 80,000 retail stores across the country. Green Dot also operates a full-fledged bank holding company, Green Dot Bank.

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Green Dot's bread and butter is made up of lower-income and lower-credit consumers who have historically operated outside of the country's banking system. By selling prepaid cards, Green Dot provides the convenience of credit or debit card purchases without the regular hurdles. Because GDOT customers can purchase, use and even re-load its cards right at major retail locations, the firm can court customers without easy access to a bank.

Because Green Dot's model is spend-centric (it earns fees when customers use its cards more), sales have grown rapidly in the years since 2008. And profitability has remained consistent on a quarterly basis as well. While GDOT may not look like a value name because of its relatively high P/E ratio, the balance sheet tells a different story: with $565 million in cash and investments and no debt, more than 60% of the firm's current market capitalization is covered by money in the bank.

At the last quarter, VCs owned 2.83 million shares of Green Dot, for a $75.5 million stake in the company.


Business cloud software firm Netsuite (N) is another venture capitalist favorite right now. VCs own approximately 294,000 shares of the $7.7 billion firm, good enough to give it fourth billing on our list. That's a $32 million stake at current price levels.

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Netsuite sells a cloud-based business management package that includes a bevy of acronyms such as ERP, PSA and CRM. In short, the firm's software handles everything from accounting functions to inventory management to managing customer lists. It's that integrated nature of Netsuite's offerings that appeals to small and medium business clients who are looking for a one-stop shop for their enterprise software.

Investors should like the fact that Netsuite earns its revenue though high-margin recurring subscription costs. While customer acquisition remains expensive, retention is dirt-cheap for NetSuite; switching costs are exceptionally high once users are in. While the firm has been spending heavily to pick up new users, profitability should look a lot more impressive once management turns off the "growth" switch. And while the firm did take on some new debt in the last few quarters, its net cash position is actually better than before.

Netsuite has been rallying hard since mid-December. With shares holding in the triple-digits, now looks like a solid time to get in.

Last up is (AMZN), a name that seems surprising to find on VCs' love list. After all, AMZN isn't some high-growth upstart -- it's the biggest retailer in the world by dollar volume, and it sports a market capitalization of $192 billion.

Still, VCs own 79,000 shares of this high-flying stock; that adds up to $25 million at current share prices.

Amazon is the 800-pound gorilla in the retail space. A decade ago, if you'd asked someone what "" was, they'd reply that it's an online book store. You wouldn't get the same response today, even if books remain an important element of AMZN's business. Amazon's existence is one of the primary factors that so many notable retail names have gone out of business in the last decade, and it's working hard to find new ways to get merchandise to customers more easily and cheaply than before.

To court customers, Amazon has expanded its service offerings to include high margin data hosting and web services, and it's also launched loss leaders like the Kindle, which are designed to spur content consumption. Luckily for shareholders, Mr. Market is willing to listen to the long-term argument in AMZN -- that's the only way to explain the gargantuan valuation premium on shares right now.

But as long as the price momentum remains intact in Amazon, it would be foolish to sell this stock. I'd still recommend keeping tight stops in this stock, even if VCs don't.

To see these stocks in action, check out the Winter 2014 Venture Capital Buys portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.



Follow Stockpickr on Twitter and become a fan on Facebook.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes, Investor's Business Daily and on Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji.

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