Below is the criteria I use to purchase stocks. This is derived from thousands of hours of research & years of trial and error. Investing in small growing companies is inherently risky. If you follow this criteria, you will certainly lose some money on the ones that don't make it, but you will always have a piece of the greats.

Do the math for yourself. If you buy 20 companies at IPO & only one hits a home run, you can lose EVERYTHING in the other 19 companies & still be rich. If you invested $5,000 each in 20 companies during 1990 & one of them was Cisco, when the valuation sell criteria was triggered at it's peak in late 1999 you could have lost $95,000 in the others & it wouldn't matter because you now have over $3 million worth of Cisco stock. Furthermore, I have NEVER lost everything in a stock. We provide you with company specific triggers which will let you get out before you get reamed.

This criteria was derived from watching companies like Cisco, Microsoft, Ebay, Siebel & others grow sequentially year after year. Though their stock price can radiate wildly about their growth curves, over time if the growth curves continues up, the stock price will follow.

At KamisInvestments.com, we can help you find these winners at IPO. We'll help you track them throughout their life cycle & then we'll send you the sell triggers - whether that trigger is based on company specific criteria or valuation. My methods are very stringent. You must have guts & not deviate. If you are prone to panic & sell at the first sign of a downturn, you will fail. If you have faith & hold tight, you will be duly rewarded over time. Why put your money in anything but the best the future has to offer?

Buy companies at IPO. Buy only once. No repurchasing allowed. Ever. Don't get yourself caught in the "dollar cost averaging" BS. Companies fail - it's a fact of life. If you continue to buy on the way down, you're putting your money into a sinking ship. The ONLY exception would be during a massive market downturn when everything is tanking. Then some broadbased repurchase of existing holdings could be quite beneficial.

Company must have at least 3 quarters of consecutive info available. If you don't have enough historical info on a company, why take the risk? This would no better than gambling. Let us watch them for you. Over time if they show solid growth, then it will be worth the risk. If a company can produce 3 sequential quarters that meet our strict criteria, then most likely they have monopolistic pricing power & it is likely they will continue to win in the market.

Revenue growth must be at least 100% greater than same period previous year. To maximize the return on investment, we want to make as much money as quickly as possible. This is the core tenant of finance. If the revenue stream isn't growing fast, then you could sit on that turkey for years with no return. There are better uses for your hard earned cash. I do make exceptions if the margins are unusually high, but we're talking 90%+ gross margins with high operating margins as well. In those cases, revenue still must be at least 50% year over year. The reason for this exception is that huge earnings can offset slower revenue streams. One could argue that earnings are MORE important than the revenue stream. The ultimate scenario is to have both. Once purchased, if revenue growth ever falls below 25%, sell. This means that either their business is failing, or the company has gotten so large that a slowdown in growth is inevitable & natural. When this occurs depends on the business & industry. Cisco was still growing at a 50%+ clip even with more than 6 billion in quarterly revenues. Truly amazing if you think about it. If it has gotten to this point & revenue growth dips below 25%, you are already a very wealthy person. Lock it in.

Revenue growth must always be sequential. This means revenues for any given quarter must always be higher than the previous quarter. If not, revenue is slowing & we don't want that. Certainly many many companies have slowed for a quarter & then gone on to have highly successful tenures. The problem is that just as many companies went on to stink up the program after such an event as well. We try to maximize return while at the same time minimizing getting the big shaft. The great ones are able to sequentially increase revenue & profits - even during economic slowdowns. This is because they produce some critical product or service. The very things that allowed them rack up such impressive financials in the first place are the same things that allow them to continue to win in the market. When revenues & profits start to fall, they no longer have this edge & we don't want them. When investing, there is little room for compassion. If you want to give money away, donate it to a good cause. At least then you can write off the donation. We want to make money & as such, the company must continue to perform. I do make exceptions for seasonal businesses. Companies in the retail sector like Outback Steakhouse and Alloy Online demonstrated consistent growth, but you have to look a little harder. During the holidays they typically have higher sales & then they taper off the following quarter. Just keep an eye on the trend & if the pattern is ever broken, sell.

Company must go from $0 revenue to $1 million within the first 3 quarters of operation. Typically our companies have between $2 to $5 million in quarterly revenues when they come public, but there are exceptions. Per #2 above, we need at least 3 quarters of data. Some companies like Juniper & Sycamore are rockets right out of the gate, but they often fail because they explode too quickly. The best returns are typically seen with companies that have a few years of solid growth before coming public & then continue the same pattern of steady growth after the IPO. To get to the billion dollar revenue plateau, a company needs to grow quickly. Typically there is a quarter or two of limited product shipment & then once the company ships in mass volume they reach $1 million very quickly. Of course there are going to be exceptions in the service area - we take those on a case by case basis. Remember, we watch ALL IPO's so eventually we will catch them on our radar screen if they take off later in life. The great ones typically are entering an untapped market with a new product & they sell like hotcakes right out of the gate.

Gross Margins must be 50% or higher and must also be sequential. This is probably the most critical element in our criteria. We're looking for monopolistic activity. If a company is selling a product or service & can only charge a 20% gross margin for that product, then either it's not a good product to begin with, it's not a necessary product or there is tons of competition. We really don't care what the reason is, we don't want to be involved. The greats always have super high margins & they are able to retain those margins year in & year out. These high margins translate into more cash left to run the business, more cash to purchase the competition, more cash to hire the best people, more cash to advertise & ultimately, to pass back to the business in the form of net income & retained earnings. Cash is king & it starts with the gross margin. Once purchased, if gross margins fall below 50%, monitor for one quarter. If they do not stabilize & continue to decline after second quarter, sell-the earnings whammy is not far behind.

Positive operating margins. Some companies take a few years to obtain positive operating margins, but the greats are usually profitable right out of the gate. Siebel is a great example. They had positive operating margins in their second quarter as a business. I will purchase companies with negative operating margins if I see a clear pattern heading upwards & the operating loss is less than $5 million. Too many times I have seen high gross margin companies that never are able to translate these high margins into a profit. Reason? They are services & what they do doesn't cost much, but there is so much competition that they have to blow their wad on advertising every quarter. We want to avoid this scenario.

Long term debt must be below $10 Million. Debt for small companies can be a very bad thing. Typically companies use bridge financing at the very beginning & then use the funds from an IPO to pay it off. If business is going well & the core products are selling as they should, the company should be able to fund continuing operations internally. Typically a secondary offering is done should more cash be required. If the economy turns south or interest rates start to rise & a small company is strapped with huge debt, they could be in real trouble. Almost every great company I have ever researched paid off their debt within a few years & never took on more. Convertible debt is acceptable, but watch out for the dilution. Paying off debt costs money - money that could be used for better purposes. I'm not opposed to incurring some debt to grab a unique oportunity, but if business is so good & a company is throwing off all kinds of cash, why are they looking elsewhere & what have they done with all that extra cash? Once purchased, if long term debt starts to creep up, monitor. If it goes above $10 million for 2 consecutive quarters, sell.

Cash flows should remain stable & improve with the growth of the company. Investors like Warren Buffet love to look at cash flows. Cash is king & the cash flow statement gives investors a good look inside the real numbers. These days there are lots of crazy pro forma manipulations going on. Accumulated deficits, stock option adjustments, acquisition of in-process technology, write down of intangibles - you get the point. It's a jungle out there & really tough to hammer down what is real and what is smoke & mirrors. The cash flow ultimately shows if the company is sucking up cash or spitting it out. Obviously we want the latter. You will see from the historical data that the trends for cash flow are not as distinct as they are for the other metrics. Often companies will make acquisitions which will blow out the flows for that quarter. We are simply monitoring the trend. The averages should show increasing cash flows. If they dip one quarter, they should work their way back up to new highs by the following few periods. New companies should be working their way from negative cash flows to positive. If a new company has massive negative cash flows, we want to be suspicious. If a company that had been turning out great numbers has 3 quarters in a row of decreasing cash flow, we need to investigate. I would not sell based solely on cash flow numbers, but I would certainly want some answers. Maybe inventories are in trouble. Maybe they aren't collecting money from customers on a timely basis. Maybe they are making too many acquisitions or doing some funny stuff with the books...

Company must have a valuation eQ of under 10. Valuation is sort of the newcomer to my criteria list. The core part of my criteria was founded around 1991. It started with revenue exclusively. Many tweaks & additions have been included over the years - mainly through the very painful process of having my butt handed to me. The past 10 years have seen some extraordinary market conditions. It's been a wonderful time for research because just about every single outlier there is can be found during this period. Trying to make reason out of the stock market can be a serious lesson in futility. It's one of the most challenging endeavors I have ever undertaken. Ultimately, it is one of the most gratifying. The rewards are as large as any you could possibly imagine. Compare the wealth of a Warren Buffett or Bill Gates to your favorite sports star, rock star or actor. Buffett could buy Michael Jordan 200 times over. Granted you can be successful at anything you do, but could you really be playing golf with the president of the US if you are the best plummer in the world? Nothing against plummers - it's an honest living, but with $50 billion in assets you can hire LOTS of them, but I digress. The need for a valuation criteria became obvious to me as I plowed money into these great companies, only to watch them all go down the toilet. WHY? How could such great companies go from $100 a share to $10? Take my word for it, there are NO MARKET TIMERS. Anyone who pretends to know what will happen tomorrow, next week or 10 years from now is a complete liar. If they could, they would be trillionaires. Completely ignore these charlatans. When stock prices are going through the roof, we all get sucked in. When they tank, we won't touch them with a 10 foot pole. Americans are a funny bunch. We will drive 5 miles out of our way to save $2 at a white sale, but when stocks are at deep discounts to their value, we won't buy. Analysts tell us to "avoid" such bargains. When stocks are highly valued & inflated above their intrisic worth, we buy. The analysts further prod us on with their comments during bull markets. Step back & think about it. Does this make sense to you?? It's the oldest adage in the stock market, but so very true. Buy low, sell high. So we want to buy low & sell high, but how in the heck can you valuate small stocks? Analysts try to apply PE valuations to IPO's which is hilarious to me. 90% of new companies have no earnings - how are you going to use a price to EARNINGS ratio on them? We have come up with a far more accurate metric. The logic here is that no company that I have ever seen deserves a richer valuation than Cisco. From IPO to it's peak in early 2000, it returned nearly 100,000% - in just 10 years!! This has to certainly be one of if not THE single best investment ever in the history of the market. A $10,000 investment in March of 1990 would have been worth just under $10 million just 10 short years later. That's an average annual return of almost 10,000%. Stick that in your pipe & smoke it. Sure makes keeping your money in that CD or money market look silly. The point I'm trying to make here is that I don't feel any company now or in the future is more deserving than Cisco. I have created a valuation metric I call "eQ" which is short for the Cisco equivalent function. What it basically says is that no company now or in the future deserves a valuation greater than Cisco at any given point along it's growth line. This metric is calculated by taking the company's market value each month, dividing it by 1,000 and then dividing that number by the quarterly revenue for that period. eQ = (Stock price * shares outstanding)/(Quarterly Revenues). Using this calculation, I discovered that it quite nicely reflected the overall valuation of not only the company, but the market as a whole. By comparing eQ valuations for many similar companies, it is quite easy to determine if the broader markets are undervalued, overvalued or right in line. Here is a spreadsheet with historical prices & eQ values for a few of the great ones: (Prices). During bad times, great companies will have valuations as low as 1. Notice that Cisco stayed within the 1-2 range throughout it's first year as a public company. During normal years, the value will be somewhere around 3 or 4. Notice how high the eQ valuation got towards late 1999 & early 2000. It rose well over 10 - ironically at the point where the entire market was absurdly over-valued. Now if you switch over to the JNPR chart, you can see it had the dubious distinction of coming public right at the peak - like so many other companies during that period. Granted Juniper was a great upstart - with some of the fastest growth I have ever seen, but was it 1,000 times superior to Cisco as the eQ denotes? I think not! Notice at IPO it had an eQ of nearly 47. It went on to nearly double from there with an eQ of nearly 100!! This means that at a quarterly revenue mark of $45 million, investors were saying that JNPR was worthy of a market cap nearly 40 times that of where CSCO was at that point. You don't have to be a brain surgeon to see that this was sheer stupidity. Yes, you could have doubled your money by buying JNPR at IPO & selling it 6 months later, but that would have been complete guesswork & luck. Nobody can time these things. There are NO billionaire market timers. JNPR has continued to deflate - right along with the rest of these high flyers & now it doesn't even fit our criteria. Their revenues took a big dump last quarter. Analysts could argue that my eQ is flawed because it only takes revenue into account, but that would not be an accurate statement. As you have seen, our criteria for picking the companies in the first place is incredibly stringent & involves many profitability metrics. To even get on our list is incredibly difficult - the eQ merely tries to assign a valuation to these companies once they have made the initial cutoff. There will always be outliers & conundrums to confuse & astound the investor. These rules are just guidelines. One must consider all facts before making an investment. In a really bad market, I'm willing to buy companies that aren't as perfect because I know the values are so low. The risk has been great reduced. If a company has operating profits of -$12 million, but they have been getting less negative for each of the last few quarters, I'm willing to take the risk that they will continue to get better. During a market of regular to high values, I would not touch it. Companies like EBAY mess up the criteria some because it NEVER came below a 5 on the eQ. If you follow my rule to the letter, we would have never bought it. That's not nescesarily a bad thing. We're not going to get every single gain that comes along. We may miss a few. We may not always get out at the top. We may not always buy at the bottom, but if you follow this system you are guaranteed to make money. Even if I did take the risk & bought EBAY at an IPO eQ of 14, I would have been terrified at a value of 30 & sold. It would have continued to march up to a value of 70 right after that. Hey, that's OK! Notice that today, 2 years later, if you extrapolate all the stock splits, you can buy EBAY for the same price it was back then. The only difference is that revenues are now at $180 million instead of $30. In fact, there was a brief period during December 2000 & again around March 2001 where you could have picked it up at an eQ around 6. Not cheap as most stocks go, but very cheap given it's historical pricing & incredible profitability. I still don't think EBAY deserves values any greater than CSCO, but it's a great company in it's own right. I think 5 years from now people will look back & find it's market cap of $15 billion to be cheap. It's got a lock on it's sector & the numbers show it. The savvy investor should invest in companies with reasonable values & sell them when the value gets too high. This allows us to lock in the profits at the peak & potentially go back & repurchase a company multiple times throughout it's growth cycle, making money each time & then freeing up money to invest in other newcomers. Buy when the eQ is below 3 & sell if the eQ gets above 10. It's as simple as that.

If the company meets all these criteria, take 30% of cash in money market sweep account & buy it at IPO. Since this plan involves a constant buying & selling, the levels in the sweep account will always be variable-thus the 30% figure. Should you be patient enough to hold on & reap the rewards of selling at high valuations, when the valuation comes back down below 5 you may want to consider a repurchase. I would do this only if the metrics for the company remain good & it isn't too far into it's growth cycle. That judgement will be mostly guesswork, but a company at $3 billion in quarterly revenues is less like to continue at the same pace as one at $30 million. I would also suggest a smaller portion of your cash - maybe 10% of the money market balance. This is because you will likely buy a bunch of companies at the bottom of a market & you don't want to wipe out your cash during a bad economic time. This is also a little more risky as it is later in the growth phase. The upside is that these companies are more established & are likely to turn around faster when buyers re-enter the market.

Hold company until sell criteria flag is triggered. Ignore analysts, ignore estimates, ignore all commentary-monitor only earnings reports & internal earnings expectations. Many people like to listen to what management has to say. I don't. They will lie right to your face. Look at all the lawsuits out there involving companies that gave upbeat reports only to tank the next quarter. They care about their stock options, not about you. We don't have to know a thing about what the company makes. We don't have to know a thing about what management is doing. The product or service is a widget to me. If they know what they are doing & the product or service is needed, the financials will show all. Honestly, in 1990 would you have had any clue what a router was? If management tells you business is going down the tube, THEN you listen. Usually it's too late by that point. Analyst's track record is about as good as a monkey tossing darts. Look at some of the advice of during the dotcom lunacy. Analysts thought nothing of telling you to buy Amazon at 150. Surely it was going to 300, they reasoned. Don't trust these people. Trust your own intuition & use the numbers as your guide. Our goal is to provide you the same tools or better than the analysts have. The only edge we can't overcome is the "inside" info that goes on in the power circles, but management will lie to an analyst just as fast as they will lie to you. Remember, 19 of them can be a scam. We just need that one. Good luck & have fun!