The best way to make big money in growth stocks is to invest in fast-growing companies in fast-growing industries, and ride the major trends for as long as they remain up.
In 2007, the biggest trend - still ongoing - was the rise in solar power stocks. And next year? Here are my five best guesses for the trends that will reward investors in 2008.
One. The race to alternative energy will continue, and solar power will remain the leading light of the industry. High oil prices and rising demand for non-polluting power will be the big drivers for the industry, but equally important for investors in the stocks will be the growing public perception of the sector. While active investors are clearly aware of the performance of the leading stocks, the man-on-the-street is not. Solar power is not yet the talk of the town, and until it is, I think the sector's current strong uptrend can continue. First Solar (FSLR) is the king of this hill today, but Suntech Power (STP) and JA Solar (JASO) are close behind.
Two. Investment in faster-growing foreign companies will continue to reward. The China boom remains amazingly resilient, and while I'm concerned that the advent of the 2008 Olympics may mark a temporary high-water market for the China market, I have little doubt that the demographic and capitalistic forces transforming that country will continue. Ditto for India, which is several years behind China on the same path, as well as Brazil. Russia, because it has amazing natural resources, has awesome potential, but I'm disappointed with its backward-looking government; I'm more impressed by the progress at former soviet satellites like Azerbaijan (with 35% GDP growth), Latvia (11.9% growth), Estonia (11.4% growth) Kazakhstan (10.6% growth) and Belarus (9.9% growth). Foreign stocks I like (traded in the U.S. as ADRs) are Baidu (BIDU), New Oriental Education (EDU) and Turkcell (TKC).
Three. The build-out of the utility infrastructure in developing nations will reward investors in two sectors. First will be the global construction and engineering firms that accomplish these big products: think power lines, dams, water filtration plants, gas pipelines and more. Second will be the local utilities that evolve to distribute these goods to consumers. This is not rocket science; these companies merely need to follow the paths trod by U.S. companies over the past century and their earnings will multiply rapidly. Chicago Bridge & Iron (CBI) is a leader here, and I also like Companhia de Saneamento (SBS) in Brazil.
Four. Resources of all sorts are meeting with growing demand in China, India and other countries, and there's no sign yet that supply will catch up with demand. Companies that benefit from this trend are those that own, mine, create, and deal in gold, silver, coal, copper, iron ore, steel, phosphate and silicon. Also benefiting are the companies that make the equipment these companies use. I like Bucyrus (BUCY) and Deere (DE) and I also like silicon producer MEMC Electronic Materials (WFR), which gets a boost from the solar power industry.
Five. Communications will continue its process of rapid evolution. We'll see greater access to wireless networks, and greater bandwidth everywhere as content becomes increasingly rich. Apple (AAPL) is a high-profile leader in this space today, and you can read more about that great company below.
In sum, I think the future is bright, and I'll be watching the top stocks in these sectors in the year ahead.
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And now some words about my iPhone ... followed by some words about Apple.
I bought my iPhone back in July, about two weeks after they came out. I could have bought right away, but I always wait to see if there are bugs before buying a new product, and from today's perspective, those two weeks are nothing.
Today, after using it for these five months, my opinion is that Apple's iPhone will rule the cell phone world for a very long time. Here's why.
1. It's easy to use. I never liked the laborious task of inputting names and phone numbers into my old phone, and with the iPhone, that job is gone. They sync in directly from my computer. Addresses, too.
2. It's a great little camera and photo-viewer, perfect both for recording moments I want to remember and for carrying around hundreds of photos that I can share.
3. It fits my hand, my face and my pocket.
4. It lets me check my stocks easily.
5. It tells me the time. Unexpectedly, I've stopped wearing watches!
6. It handles voice mail far better than any old cell phone. All messages are labeled, so I can play the ones I want when I want.
7. It holds all my favorite songs, so I can listen to music while I'm shoveling snow or flying to the Caribbean.
8. It lets me check the weather forecast, for both Salem and anywhere else in the world.
9. It handles email easily.
10. It lets me take notes, without paper and pencil.
11. It lets me surf the Internet, though its speed on AT&T's EDGE network is unsatisfying. Next year should see models that work on the faster 3G phone network.
12. It lets me check my calendar, which is always synced with my computer.
13. Occasionally, I'll even play Sudoku or Bejeweled on it, or watch an amusing YouTube video.
What I don't do with the iPhone is text-message, buy music, or use the calculator. But it's with me almost everywhere I go, and my wife recently said that her next phone would be an iPhone, too!
And she's not the only one. iPhones are said to be the most-requested Christmas gift in the teenage crowd this year.
Bottom line, the iPhone has been a home run, despite the comments of Microsoft CEO Steve Ballmer, who in April predicted, "There's no chance that the iPhone is going to get any significant market share. No chance." (Well, that's his job.)
Fact is, in the third quarter, the iPhone grabbed second position in the smartphone market, with a 27% market share. First by a slim margin was Research in Motion's Blackberry, while in third place were all phones running Microsoft's Windows OS.
And what's happening now is that people who've come to love their iPhones are deciding that their next computer will be made from Apple, too
This even includes guys in the financial world who you'd swear would stick with their Windows-based PCs forever. I know; I've met several of them in recent months. They've been snowed by Apple's ease-of-use, and they're happily looking forward to joining the virus-free world that is Apple.
As a result, Apple's market share, based on computers sold, grew to 8.1% in the third quarter, up from 6.2% the year before. Dell and Hewlett-Packard (both peddling Microsoft Windows) are still far ahead, with 29.1% and 25.7% market share, but Apple is closing in fast, and it appears that Microsoft is powerless to reverse the trend.
So what about Apple stock (AAPL)?
Well, I made the mistake earlier this year of being too cautious about AAPL, reasoning that it was too well loved by investors, and thus possibly near a top. Heck, one reason for my caution is that I've loved the company's products myself for years, and I was afraid that that love would impede my judgment of the stock.
Still, it was a very good year.
And looking forward for AAPL? Well, it's expensive, but the best growth stocks are always expensive. More important is that the stock remains one of the market's stalwart leaders, holding above both its 25-day and 50-day moving averages. Short-term, the broad market is still on shaky ground, so buying here may or may not work out. But long-term, I think AAPL is a winner.
Apple is no longer a part of the Model Portfolio of Cabot Market Letter, but Research in Motion is, and the portfolio has achieved a 27% profit in it ... since September! Year-to-date, the Model Portfolio is up over 30%.
If you're looking for sensible advice on investing, based on a system that's been continuously refined for over 37 years, I recommend a no-risk trial subscription.
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Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory