Making It Through the Minefield

 
I hope you'll pardon me, but I have a sad tale to tell. It ends with a rant, and I hope you'll forgive me for that, too. But this is something I have to do.

Crocs, the maker of the deliciously comfortable, horrendously ugly shoes reported its earnings on Wednesday, October 31 after the market closed. The good news is that the company's profits more than doubled, reaching $0.66 a share vs. $0.25 for Q3 last year. This profit exceeded expectations by a few cents. Hurrah.

But when the company issued its outlook for total 2007 earnings, raising its guidance by about a nickel over last quarter's estimate, the Street wasn't pleased. By the close of the next day, November 1, CROX had fallen 35.6% from its previous day's close; volume was 56.7 million shares. Friday's action was initially negative, but eventually produced a small gain.

The big question for CROX shareholders is, obviously, what to do. Some investors listened to the earnings call and, hearing the disappointing guidance, sold before the stock fell out of bed. Others woke up the next morning to find that the stock had fallen into the abyss.

Cabot's experience in dealing with this kind of dramatic collapse (which happens too often to allow us to face earnings season with total equanimity) is only slightly helpful. When stocks that have made huge advances take an equally huge hit, the reaction from investors is as much emotional as rational.

Stocks that go up make us feel good about ourselves and there's a bit of romance in our reaction. The stock goes up, we make money, we feel smart, we fall in love. At Cabot we even call the period of a monster stock's initial rally "the romance phase."

But romance (almost) never lasts. No stock goes up forever. And when the breakup comes, the result can be ugly. If you think of how some people who were deeply in love just last week can act toward one another after a breakup, you will get some idea of how a stock that was everyone's sweetheart a few days ago can turn into a toad overnight.

It can take a long time for a stock that has lost favor to get back on track. Hansen Natural (HANS) was one of the truly heroic stocks of 2004-06, soaring from 1 at the beginning of 2004 to 53 in July 2006. The Cabot Market Letter began following the stock in March 2005 when the stock was trading at 6 (split adjusted) and stayed with it through June 2006 when it pulled back to 47. The romance ended for Hansen in September 2006 when the stock fell from a high of 47 to a low of 28 in one week. HANS then took three months to build a new base, a full year to get back to its high from the week before it cratered, and more than 14 months to record a new price high.

Our advice to people who are still holding CROX and have a profit is to sell half of the stock and wait for the bounce that often follows such a steep decline to sell the rest. This isn't a buying opportunity or a chance for value investors to get on board (even with the stock trading at 46 as I write, the P/E ratio is still 26). This is a time to preserve as much of your capital as you can and to try to put the experience behind you.

I have genuine sympathy for everyone, whether they're our subscribers or not, who has lost money (or lost the heady feeling of having a big winner) on CROX. But I do need to get one observation on the record.

Like nature, the stock market is a tough teacher; it tests first and teaches afterward. In this case, the lesson is the value of diversification. I've talked to people in the last couple of days who weren't diversified, who thought that CROX alone was their ticket to riches. The litany of good advice that we - and all the other responsible stock advisers that I know about - have given about the need to spread your risk around isn't just talk. The marriage of risk and reward is one romance that never breaks up. I just hope that the people who put all their eggs in the CROX basket can make an educational omelet out of the resulting mess.

---

Now that I have that off my chest, I have a completely frivolous subject for you.

In the dark days before e-mail, before electronic printers, even before Xerox machines, there were still humorous pieces that circulated through the offices of America. They were typed, and many of them were fuzzy because they were produced at the back of a stack of copies made with carbon paper. They weren't really much higher in quality than the stuff that makes the rounds of the globe by e-mail, but they were a lot more trouble to produce, which meant that there were fewer of them. Scarcity produces value.

I still have a collection of those old "pass-it-on" pieces, and I want to share one with you. This is from the early 60s, when JFK was still president. I collected it when it was published in the Medford (Oregon) Mail Tribune. I clipped it out and I'm reproducing it here because I've always liked it and don't want it to fade away like the yellowed piece of newsprint that I've kept for so long. With any luck, someone will put it on the Internet, and it will last forever. All the place names are in Oregon.

Groom Simply Stunning In Peachy-Keen Outfit

GRANTS PASS (AP) Bob Grant, publisher of the Illinois Valley News, published his version of a wedding after the expected information failed to reach him.

He collaborated with Don Rosenberg of Cave Junction, father of the bridegroom and came up with the following version of the Gibbons-Rosenberg wedding in Cave Junction:

"Leland was beautiful in a black suit of wool with matching lapel pressed down sharply against the chest. Peering out of the left breast pocket were four tips of a cleverly folded white linen handkerchief while on the left lapel, quaintly held by placing the stem through an unused buttonhole and securing it with a small silver hat pin, was a white carnation.

"He wore a shirt of white nylon, severely plain, which was held together at the front by little buttons of plastic. Around his neck and under the shirt collar was a tie of black jersey, knotted carefully in decorative style, and held to the shirt front with a clamping device of gold plated brass. The cuffs of the shirt sleeves were closed with links of the same plated metal.

"On his left wrist he wore a mercury battery-powered watch, a Christmas gift from his father, that was held in place with a metal band. His trousers, of simple pleated design, matched the coat and were supported by a belt of black goatskin. His shoes, of black horsehide, covered socks of some dark material and were fastened with a bow.

"He wore no hat and had his hair combed back and then forward from the forehead in a slight wave with no visible means holding it in position.

"The bride wore the customary white."

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After writing about what happened to CROX earlier, I'm in the mood for a slightly more conservative stock pick, which leads me to Companhia de Bebidas das Américas (known to its friends as AmBev), a Brazilian manufacturer of beer and soft drinks that does business in 14 countries. The company has brands that date back to 1888 and is headquartered in Buenos Aires.

AmBev is primarily a beer brewer, but it has a diversified brand lineup. In addition to its Brazilian brands like Brahma and Skol, the company brews and sells Bud and Bud Light in Canada (under license from Anheuser Busch) and Pepsi and Diet Pepsi soft drinks in Brazil (under license from PepsiCo.). It also has Lipton teas, Miller, Stella Artois, energy drinks, Labatt's beer and Gatorade.

A little over half of the company's revenues come from beer sales, and revenue growth has been steady, with added impetus coming from the rapid recovery of the Brazilian economy in 2004 and 2005. Earnings were up 25% in the most recent quarter with revenues up 26% and an after-tax profit margin of 18.7%. The stock pays a tidy dividend of 1.7%.

The chart for ABV isn't the stuff that dreams are made of, but it's the kind of stock that can anchor a portfolio, a core holding that advances steadily while the dividend does its work. The stock corrected sharply (along with the rest of the world) from mid-July to mid-August, but took only about six weeks to move out to a new price high.

I could make a cheap joke about how the stock market can drive you to drink, but that's not my style. I'll just point out that AmBev has a nice portfolio of beverages, both alcoholic and non-alcoholic, with a marketing reach that already spans both North and South America and is growing. It looks like a good buy right where it is.

Paul Goodwin
For Cabot Wealth Advisory

Editors Note: Paul Goodwin is the editor of Cabot China & Emerging Markets Report. Rated #1 Top Performing Newsletter over the last 12 Months by The Hulbert Financial Digest.

The emerging markets have outperformed the markets of the developed world over the past few years, and China is the clear leader in economic growth. But it's not the only player. The Cabot China & Emerging Markets Report focuses on the BRIC countries (Brazil, Russia, India and China) and seeks out the stocks with the best stories, the soundest fundamentals and the hottest charts. It was the top-rated investment newsletter for 2006 and has held onto that lead since. If you'd like a dependable guide to investing in these intriguing markets, you should consider a no-risk subscription. Click below to get started.

http://www.cabotinvestors.com/eccihcwa06.html

Paul Goodwin can be found on Google Plus.

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