By Paul Goodwin, Cabot Analyst and Editor of Cabot China & Emerging Markets Report
For Cabot Wealth Advisory 2/11/08 Sign up for free Cabot Wealth Advisory e-newsletter

It's February in New England. (Well, it's February everywhere, but the month means something entirely different to someone in New England than to someone in, say, Florida.) We've had plenty of snow and plenty of reasons for non-skiers like me to sit on our sofas in our sweatshirts and watch television.

It's also the month when many New Year's Resolutions butt heads with the reality principle and people who spent lots of time in the gym in January are now self-medicating their winter blues with pints of Haagen Dazs.  

It's also winter for investors, as major indexes continue to either work their way lower or are sitting at what might be the start of a bottom building process.  

While there isn't any substitute for the diet and exercise you promised yourself you'd do six weeks ago, there's a stock diet that will allow you to make huge progress in your equity portfolio. I call it my SNaC Diet, and it's the best way to get your portfolio in shape, even if you can't seem to make progress in the campaign against your love handles.

SNaC stands for Story, Numbers and Chart, and it's the method I use to pick stocks for the Cabot China & Emerging Markets Report. There's nothing complicated about it, but it can be very powerful. Just because it's simple, that doesn't mean it's easy to do, any more than the simplicity of "exercise more and eat less" makes that particular prescription easy. Here are the basic principles.

Story
Story includes the basic market proposition of a company, including its products, its target consumers, its potential for huge sales growth, its
barriers to entry, its competition, its intellectual property, its management and all the other stuff that you can put into words. When someone buttonholes you at a party and tells you about a penny stock they've found that just can't miss...what you will probably hear is the power of a stock's story at work.

Story is an attractive way to look at stocks because we're all trained to react to stories. We like books and movies about people who have great ideas and struggle (against apathy, short-sightedness and malevolence) to gain acceptance (and make a pot-load of money).  And we're attracted to the same things in stocks.

Numbers
But there are lots of stocks with great stories that don't do a thing. I also want good numbers, which are a record of a company's success. I look for stocks that have been growing revenues and earnings for a number of quarters, ideally with earnings (profits) rising faster than revenues (sales). I like to see the rate of growth for both categories rising. It's also nice to have an increasing number of institutional investors and an after-tax profit margin that's high and rising. And finally, I want a stock that's liquid—trading at 400,000 shares a day or more—so Cabot subscribers can trade without being worried that the stock will get deep-sixed by one money manager who wants out.

Numbers can be comforting because they give you a sense that more and more consumers and businesses are buying a company's products, and that management knows how to grow profits.

Charts
Charts are where the rubber meets the road in growth stock investing. Some highly technical investors don't even care what a company's product is or how much money it's been making. They think they can tell everything they need just from a stock's chart.  I'm not that confident, but I know that a stock with a rising price and good volume support must be doing something right. When I screen my emerging markets investment universe for candidates to recommend, I'm really looking for stocks whose price is rising. And that's what's on a chart.

Charts also tell you about a stock's momentum—whether its rate of appreciation is rising or falling, whether it's shaping itself into any of the classic patterns of consolidation, reversal or base-building. I've sold stocks that were going up steeply because the chart told me it was a climax top. And I've bought stocks that had advanced sharply and then corrected into a tight pattern that indicated steady accumulation.

Of the three components of the SNaC strategy, I guess I like the charts the best. But I can see the value in all three, and I think that all three parts—Story, Numbers and Chart—can help to shift the odds in favor of a stock's success. The best stocks have great stories, strong numbers and technically attractive charts.  In an enterprise that requires you to use every advantage at your disposal to get the odds on your side, it just makes sense to go for the complete package.

Even if you can't lose the pounds you wanted to, you may be able to use the balanced investing diet of Story, Numbers and Chart to SNaC your way to enough money to buy lots of Haagen Dazs.

Click here for more information on Cabot China & Emerging Markets Report.

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