On Cabot Track Records
By Timothy Lutts, Cabot Chief Investment Strategist
From Cabot Wealth Advisory 2/23/08 Sign up for free Cabot Wealth Advisory e-newsletter
One of the most common questions from Cabot readers is, "What's your track record?"
For Cabot Market Letter, which provides specific portfolio allocation advice, the answer is easy: during the past five years, the portfolio is up 5.8% annually, while the S&P 500 is down 0.8% as of September 30, 2009.
For Cabot Benjamin Graham Value Letter, since its inception in 2002, the Classic Model delivered a 10.9% compound annual return, while the Dow brought just 1.3% as of September 30, 2009. And its Wise Owl Model, running since 1995, delivered 13% while the S&P 500 returned 4% as of September 30, 2009.
For Cabot China & Emerging Markets Report, Hulbert Financial Digest ranked it the top performer in both 2006 and 2007 with returns of 76% and 74%, and it is ranked the top-performing investment advisory for the past five years with a 22.8% anualized return versus 1.3% for the Wilshire 5000 as of September 30, 2009.
But for Cabot Top Ten Weekly, the answer depends on how subscribers act on the advice. To illustrate, I'll take you on a tour of Cabot Top Ten Report, analyzing in detail not just what you can get in the way of advice but also what you can earn in the way of profits.
Cabot Top Ten Weekly, by the way, is not for beginners. Until you know what you're doing, I recommend you stick with Cabot Market Letter for growth stocks and Cabot Benjamin Graham Value Letter for value stocks. But if you've learned how to manage your portfolio properly, and how to control your risk, you're ready for Cabot Top Ten Report.
Cabot Top Ten Weekly is published every Monday. It devotes one complete page to each of ten stocks, all of which have been chosen by our proprietary OptiMo screening software on the basis of their chart strength. These are hot stocks!
Each page includes a fundamental description of the company and its business, examining the reasons for the stock's strength. We tell you what we like about a company. When appropriate, we even tell you what we don't like. Then there's a technical analysis of the chart, examining support and resistance areas, moving averages, trading volume and more. There's a table of revenue and earnings trends during the past year. Finally, and most important, there's a recommended buy range, valid for two weeks.
Knowing that most stocks advance in a two-steps-forward, one-step-back pattern, our goal is not just to get you to buy the market's strongest stocks, but to get you to buy during that one step back, thus lowering your downside risk and increasing your upside profit potential. And how long do you hold these stocks? As long as they're going up!
To give you some examples of how this advice can be used, I looked back at a month-old issue (January 21) of Cabot Top Ten Report and here's what I found. The ten stocks featured were:
- Auxilium Pharmaceuticals (AUXL)
- BioMarin Pharmaceuticals (BMRN)
- Cepheid (CPHD)
- DeVry (DV)
- LKQ Corp (LKQX)
- Martek Biosciences (MATK)
- Millennium Pharmaceuticals (MLNM)
- Pan American Silver (PAAS)
- Pharmaceutical Product Development (PPDI)
- Randgold Resources (GOLD)
You probably noticed the heavy weighting of pharmaceutical companies. That's no bias of mine, or of the editor, Michael Cintolo. It simply reflects the fact that pharmaceutical stocks were hot then. So OptiMo served up a bunch of them.
If you bought these stocks right away, you would have done OK relative to the market. But the best results come when you adhere to the buy ranges—allowing you to buy strong stocks effectively on sale! In fact, if you had simply waited to buy each of these stocks until they first traded in our buy range your average profit would be 3.2%...not bad for a one-month period in which the Nasdaq is down 1.5%.
But it's probably not realistic to think that you'd buy all ten stocks. We all like to use a little judgment. And editor Michael Cintolo, in fact, will help you out here. Upon re-reading the fundamental commentary on these stocks I note that Mike expressed mild reservations on two of them. For LKQ, he wrote, "We don't particularly like the reduced earnings estimates or the fact that the stock just split two-for-one, which often occurs near a top." For Martek, he wrote, "The company has been plagued by execution issues in recent years...management's checkered past makes this a more speculative play."
If you had taken these warnings seriously and simply avoided those two stocks, both of which have brought small losses, you could have done even better! Instead of an average return of 3.2%, your average return would have improved to 5.1%. And you'd hold only two losers.
Taking it one step further, if you had simply implemented a simple system of selling every stock that closed below our recommended buy range (selling at the open the next day), you would have seen a substantial improvement. The result: the average return from your eight buys would be 6.7% in just one month...and you'd be holding six stocks, all winners. Specifically,
- Auxilium + 7.9%
- BioMarin + 5.8%
- Cepheid + 8.6%
- Pan Am Silver + 10.5%
- Pharmaceutical Product Development + 1.7%
- Randgold Resources + 31.3%
To summarize. The best results come from avoiding stocks with unattractive fundamentals, buying inside our recommended buying range, and selling stocks that close below that level.
Looking at a very different market environment, I went back exactly six months, to the issue of August 20, 2007. That, you'll recall, was immediately after the August market bottom and the subsequent big discount rate cut. The stocks featured then were:
- Anadigics (ANAD)
- Blue Coat Systems (BCSI)
- EDO Corp. (EDO)
- FTI Consulting (FCN)
- Illumina (ILMN)
- Juniper Networks (JNPR)
- NVIDIA (NVDA)
- Oceaneering International (OII)
- Research in Motion (RIMM)
- Under Armour (UA)
Running the calculations, I find the following. EDO was bought by ITT in December at a price 40% higher than when featured, but its chart is not available now, so I exclude it (sadly) from these calculations. One month after publication, the nine other stocks in that issue were up an average of 13.0%. There were no losers.
If you had waited to buy until the stocks pulled back to our recommended buy ranges, you would have bought only five—the other four didn't oblige with a pullback—and your average profit would have been 9.2%.
Finally, if you had avoided the one stock about which Mike had a fundamental negative comment—Under Armour had excessive valuations—you would have owned four stocks with an average profit of 10.0%.
So what can we conclude from these studies about the stocks in Cabot Top Ten Weekly?
1. They tend to advance in the month after publication.
2. You can make great money by waiting to buy on pullbacks.
3. You can make great money by avoiding stocks with unfavorable commentary.
4. You can minimize losses by using various selling disciplines.
In short, these stocks provide excellent opportunities for short- and intermediate-term profit-making. But to make optimum use of them, you've got to pay attention. If you can do that, you are ready to become a regular reader of Cabot Top Ten Weekly.