Still Dicey

 
It’s still dicey out there with the market now searching for “appropriate” valuations for stocks. That’s a process that will take some time to work out as major questions about the health of both the U.S. and global economies loom large. Sectors are being taken out to the wood shed one by one. First it was biotech. Then oil. Then tech. And now banks. There are few places to hide and completely avoid the pain—perhaps aside from utilities. But that’s not exactly the place for a small-cap growth advisory to focus!

Gold has been another outperformer of late. My watch list of junior gold miners is on fire. The challenge there is that they’ve rallied hard several times over the past four years, but each time it’s been a head fake—the long-term trend is still down. If a number of these companies can get off their backs and stand strong for a few weeks, I’ll consider adding one to our portfolio (most on my watch list now trade well below 1.00). But to be perfectly honest, my preference is to focus on companies that are developing valuable products, not digging for gold.  

This updated chart of sector performance for both large and small caps so far this year should put a little more context around the discussion. I think it speaks for itself.


We’ve been through this before, most recently in 2011 and, of course, in 2008-2009. While many of the details that are driving stocks now are different, my game plan remains much the same: focus on emerging pure-play small caps with significant exposure to major global and/or regional growth and recovery trends.

Good candidates need to have great business models. They need to have excellent products now, and show evidence that more excellent products are coming in the future. And they have to show solid fundamentals, including revenue and earnings growth. Even if they’re not profitable now, the earnings trend needs to be up. There also has to be at least a few upcoming milestones and events that can energize shares and build long-term shareholder interest.

The window of opportunity to buy these companies at great prices often comes during market corrections such as this. The challenge is that only in hindsight does it become obvious when the right time to buy (or sell) was. We will take some hits as the market searches, and eventually finds, a bottom. Stick to stop-loss levels (I use 30%, you should use what feels appropriate for you), average into positions (this is up to you since I record prices on the day a stock is recommended) and don’t do anything too drastic. When the market turns, we will participate in the upside.

Tyler Laundon is Chief Analyst of Cabot Small-Cap Confidential. To read subscriber reviews of Cabot Small-Cap Confidential, click here.

This is an excerpt from Cabot Small-Cap Confidential, which features little-known stocks with big potential. It offers a limited number of subscribers the opportunity to discover overlooked, low-priced stocks that have the potential to skyrocket. This advisory is best suited to experienced investors who embrace volatility.


Stock Picks

Loews Corp.

This undervalued stock has strong future earnings growth expectations.

Biogen

Biogen is the market-share leader in treating multiple sclerosis.

Weibo

One of Paul Godwin’s favorite stocks in his Cabot Emerging Markets Investor portfolio.

Cabot Wealth Advisory

Does Alibaba (BABA) Stock Measure Up to Amazon (AMZN)?

By Paul Goodwin on September 23, 2016

Alibaba (BABA) is the Amazon (AMZN) of China. But does BABA stock measure up to AMZN stock? Let’s break it down!Read More >

As Stock Market Trends Change, Invest in these New Leaders

By Michael Cintolo on September 22, 2016

History tells us that all stock market trends change, and if you don’t recognize the leaders of that change early, you risk missing out on the next big winners.Read More >

AMZN Stock vs. FB Stock: Which Is the Better Value Buy?

By J. Royden Ward on September 20, 2016

For the past five years, AMZN stock and FB stock have been two of the market's great growth stories. But could you make the case that either stock is still undervalued? Let’s break it down.Read More >