Reprinted from MarketWatch
Adroit newsletter bull eyes buys
Commentary: Crash survivor Cabot Market waiting for signs of a turn
By Peter Brimelow, MarketWatch August 15, 2011
NEW YORK (MarketWatch) — A bull that dodged the crash (mostly) is eyeing buying opportunities.
I’ve been writing about Cabot Market Letter for years. It has a long and impressive record of adroit moves, most recently sticking to and profiting by a brave bullish call made in early 2009.But when I last looked, it was unusually pessimistic. (See “Top-performing bull edging for exit,” May 19).
As a result, Cabot now views the recent market mayhem with some complacency. It wrote last week: “But if you had a decent cash position before this unraveling began (we were never more than 65% invested), and did some selling during the decline (we’re currently 53% in cash), now is generally the time to sit back, let the market do its thing and watch for signs of a turn.”
One surprisingly effective way of avoiding volatile markets is to stick to a fully invested system. Recently, I’ve looked at two such systems: David Fried’s Buyback Letter and Charles Mizrahi’s Hidden Values.
Cabot Market Letter is sort of a hybrid. It does offer market timing advice, based on long-, medium- and short-term indicators, all currently negative. But it also buys and sells stocks according to a disciplined combination of fundamental and technical indicators.
Right now, for example, despite its negative timing indicators, it is still recommending purchase of Green Mountain Coffee Roasters Inc. (GMCR) because its stock price remained above its 50-day moving average and because earnings are increasing rapidly.
Conversely, last Thursday Cabot sold SodaStream International Ltd. (SODA) despite strong earnings because the stock had collapsed: “Shares are well below our loss limit, and thus, we’re forced to sell.”
One feature of Cabot’s method: It explicitly eschews overall forecasts and macro musings. (See “Disciplined bull says ignore unexpected events,” March 7, 2011).
It says: “In uncertain and dramatic environments like the one we’re living through now, it’s only natural to seek some certainty by listening to forecasts and predictions. Don’t fall for it! The fact is, nobody, not even the market itself, knows that far in advance what’s to come. The key is to take it week by week and to stay in gear with the market. Thus, right now, it’s time for defense — protect your capital by holding cash and, should we get a bounce of a few days, selling some shares into it.”
“The good news is that, once you’ve built up a sizable cash cushion, you can begin hunting for the big leaders of the next upleg. Those stocks truly have a great chance of bringing you triple-digit gains ... once the sellers have finished their work.”
Cabot even added something that looks almost a prediction: “We think the best stocks could soon begin to resist further declines, beginning new consolidations for when the bears cede control.”
It works. Over the past 12 months through July, Cabot was up 40.69% by Hulbert Financial Digest count vs. 20.7% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. Over the past 10 years, the letter was up an annualized 7.71% vs. 3.67% annualized for the total return Wilshire.
Hulbert figures including this awful August won’t be available until the end of the month, but Cabot itself writes: “All told, as of Tuesday’s close, our Model Portfolio was up more than 3% for the year … nothing to celebrate, but it beats the 7% losses seen in the major indexes.”
Without actually making buy recommendations, Cabot hints: “It’s too soon to tell for sure, but we’re very optimistic that many of the recent fast-growing IPOs have a shot at leading the next bull phase. Companies like LinkedIn Corp. (LNKD), Fusion-io Inc. (FIO), Zipcar Inc. (ZIP), Francesca’s Holdings Corp. (FRAN) and even Teavana Holdings Inc. (TEA) all have unique, new stories, great revenue growth and the potential for big earnings down the road.”
“We think big investors looking for fresh opportunities could begin to build positions during this decline,” Cabot says.