The following commentary originally was sent to Growth Seeker subscribers on Dec. 16, 2015, at 10:49 a.m. ET.
Shares of Yelp (YELP) fell 9% yesterday on the news that Facebook (FB) may be aiming at local search and recommendations with a Professional Services feature. Facebook has not formally announced the offering, but more on it can be found here. Stepping back, it looks rather likely that -- in addition to Yelp -- Facebook's Professional Services will come to blows with Angie's List (ANGI), Groupon (GRPN), LivingSocial and others that seek to connect people with local businesses.
To us this reignites a question that Apple's (AAPL) Steve Jobs would reportedly raise when contemplating new initiatives: "Is it a product or a feature?"
We also recognize that there is an even better question than, "Is it a product or a feature?" In ferreting out the up-and-coming mid- and large-cap stocks to be, such as the next Facebook, Netflix (NFLX), Amazon (AMZN) or the next Skyworks Solutions (SWKS), we would much rather ask "Does the company have a solution?" Netflix is one solution for cord-cutters and the shift toward streaming services. We would argue that Amazon and its Prime service is THE solution for online shopping. Skyworks and other RF semiconductors firms are thesecret sauce -- as mobile connectivity moves past smartphones and into other markets. Those are just some examples, but you get the idea.
As investors, we at Growth Seeker would much rather own innovators of new products -- and solutions that are addressing pain points or benefitting from disruptive forces and changing economics, demographics and psychographics in the marketplace -- than companies that offer features that will soon be co-opted by other companies and their products. One such example is wearable capture company GoPro (GPRO), which has seen shares drop significantly from their 52-week high of $69.75 to the current level near $18. What's behind that move in the shares?
While some would point to missed top- and bottom-line results for the third quarter, we would note the driver behind that miss: the growing competitive landscape as Sony (SNE), Eyeshot, DBPower, Toshiba, GoTop and Xiaomi -- to name just a few -- have brought competing offerings to market. In Xiaomi's case, its $64 product price point is in sharp contrast to GoPro's $200 to $439 GoPro Hero4 models.
The bottom line is that feature-driven companies may offer growth in the short term, but they will not survive the onslaught of "me too" companies that bring similar features to market. Over the long haul, product and solution companies are the ones that will grow from small-cap to mid-cap, and mid-cap to large-cap companies.
These are the names we are seeking.
Chris Versace and Lenore Hawkins are co-portfolio managers of Growth Seeker, a model portfolio designed to identify tomorrow's large-cap stocks while they are still small- and mid-cap stocks. To learn more about this dynamic tool for investors, click here.