Apple vs. Baidu vs. Suntech vs. MasterCard vs. Home Depot vs. Coach

 
This is the political segment of this email. Now it's over.

(Aren't you glad?)

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Bigthink.com Versus YouTube

This is the ideas segment of this email. It's an unsolicited plug for a new web site called bigthink.com, which you might call the antithesis of YouTube.

YouTube, in my opinion, has become dominated by mass-market stupid fun, and while I like fun as much as the next guy, I believe the world needs intelligent discussion if it's going to move forward.

So I was thrilled when I read in Monday's New York Times about the launch of bigthink.com.

This new Web site, in short, aims to become the center of a global online conversation about important questions.

Questions like:

What needs to change in academia? Where is the media headed? Can technology make us happy? Has capitalism run amok? Should we raise the retirement age? Does open-source genomics present any bioethical dilemmas? Can the U.S. stay competitive with China? Is there a demographic crisis in the Middle East? Is terrorism our fault? Are we living in the second gilded age?

... and much more.

Bigthink is funded by successful entrepreneurs like Peter Thiel (PayPal and Facebook), Larry Summers (Former Secretary of the Treasury, Former President of Harvard), Tom Scott (Nantucket Nectars and Plum TV), and Gary David Goldberg (creator of Family Ties and Spin City).

And it's got a heavy dose of Harvard content, as evidenced by the online presence of Stephen Pinker, Alan Dershowitz, Niall Ferguson and George Church, among others.

These Harvard faculty members are among the 100 highly-respected people who sat with the site's producers to provide intelligent video commentary on the important questions of the day. Also represented are Sir Richard Branson, Senator Ted Kennedy, Richard Meier, Former President of Ireland Mary Robinson, Jacques Pepin, Calvin Trillin, Naomi Klein, Moby, Supreme Court Justice Stephen Breyer, Paul Krugman, former Secretary of Commerce Peter Peterson, former Director of the CIA Jim Woolsey, Virginia Postrel, Deepak Chopra, Walt Mossberg and - for better or for worse - most of the current presidential aspirants.

But here's what makes it interesting. You can comment on their views, and you can even ask your own intelligent questions, to be answered by other viewers.

The site's creators act as both moderators and mediators, so there's little chance that any discussion will fall to the level seen on so many sites that invite user content. The real question is whether enough intelligent people will take the time and effort to participate, and whether they will ultimately make a difference.

I suggest you check it out, after you read today's final segment ... on investing.

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This is the investment section of this email.

Every year, I run an in-house stock-picking contest for all employees.

At the start of January, each employee picks a stock that's traded on the NYSE, Nasdaq or AMEX, a stock that they think will do well in the year ahead. And that's all. There is no switching horses mid-stream, no moving to cash in a bear market. It's pure buy-and-hold for 12 months.

At year-end I print out the results, and the winner gets ... recognition. It's a cheap contest.

But I do it for several reasons, not least of which is that I like competition. And I do it because we learn things.

First of all, we learn that buy-and-hold as an investment strategy often stinks. Of course, we already know that, but the contest serves to remind us all that selling is a very important part of investing.

In 2007, for example, three of our picks lost more than 50% of their value; the biggest loser was E*Trade Financial (ET), down 83%. Offsetting those losers, six employees saw their picks climb more than 50%; the champ was SunPower (SPWR), up 250%; the runner-up, chosen by several people, was Apple, up 133%.

60% of the employees picked winners, and the average winner was up 100% while the average loser was down 45%. Not bad.

We also learn that no one wins all the time. The 2006 winner was a woman who selected American Eagle Outfitters (AEO) simply because she liked to shop there; she saw her pick soar 91%. But her 2007 selection, Nordstrom (JWN), lost 25%.

Similarly, the fellow who finished at the bottom in 2006, thanks to his selection of Cuisine Solutions (FZN), which dropped 48%, picked SunPower as the winner in 2007.

Finally, it helps keep us humble, especially when we look back and try to remember why on earth we picked those particular stocks.

2008 Picks

So now, here are some of the high points of our 2008 picks, some of which have been recommended in various Cabot publications, and some of which have been chosen for more personal reasons like, "I like to shop there."

Apple (AAPL) is back; two of the people who had it last year are sticking with it this year. I'm very bullish on Apple's business, but I think the stock is a bit high.

There are two solar power stocks.

One is First Solar (FSLR), which gained 795% in 2007. The other is Suntech Power (STP), which gained 142%. There's no doubt that business for these companies will be terrific in 2008. The question is whether the stocks can keep going. So far, they're okay.

And there are three Chinese stocks.

The first is Baidu (BIDU), the Google of China, which gained 245% in 2007.

The second is New Oriental Education (EDU), China's leading for-profit educator, which was up 140% in 2007.

And the third is Wonder Auto Technology (WATG), which makes alternators and starters for China's booming auto business. This little company just came public in August, and it's off to a good start, though it's still lightly traded.

There's also an Argentinean stock, which recently appeared in Cabot Top Ten Report. It's MercadoLibre (MELI), and it's looking to be the eBay of Latin America. It gained 150% last year.

And then there's MasterCard (MA), which gained 118% in 2007, and was recently featured as a Cabot Stock of the Month.

The people picking these stocks are generally assuming that their stocks' uptrends will continue, driven by global forces and supported by good management. And no doubt some will. But for a whole twelve months?

And then there are the people (typically in customer support) that chose companies they like.

The woman who says she goes to CVS (CVS) "every day," and who held the stock for a 15% gain in 2006 and a 28% gain in 2007, wanted to buy Dunkin Donuts this year. Unfortunately, the coffee-and-donut company, founded in Quincy, Massachusetts in 1950, is owned by three private equity firms: Bain Capital, The Carlyle Group and Thomas H. Lee Partners. So she stuck with CVS for a third year.

One woman chose Home Depot (HD), which lost 32% of its value last year. Cabot Benjamin Graham Value Letter says the stock is cheap here, but that didn't matter to her. She chose it because she just bought her first house and she's been spending a lot of time (and money) in the store.

Another woman selected Coach (COH) because she loves their products. The one-time market darling lost 28% last year. To me, it still looks expensive.

And another selected PF Chang's China Bistro (PFCB) because she loves their food and the notes that the company is expanding locally. But the stock dropped 40% in 2007, apparently because those expansions are costly.

There are more, but you get the picture.

If trends continue, the stocks that were winners last year will continue to reward. If housing rebounds strongly (I have my doubts), Mrs. Home Depot could win. But if things fall apart, Mrs. CVS could roll to a third year of modest but reliable gains and take the cake.

I'll let you know how it goes a year from now.

My pick, by the way, is New Oriental Education (EDU), which is thriving by teaching English to Chinese students of all ages, and also teaching test preparation courses. I like it because I think the growth of China will continue at a rapid rate and because I value education highly. Also, the company is fast-growing and very profitable; in the third quarter, revenues grew 50% from the year before while the after-tax profit margin was 43.9% (there's a strong seasonal component here). And finally, the chart looks good.

Since topping at 92 in late October, the stock has been consolidating the year's gains, and stabilizing in the 80 area, where both the 25-day and 50-day moving averages now rest. There have been no big selling pressures, and the market's big gyrations of the past week have had little effect. In sum, it looks like buyers are slowly accumulating shares, and that the next major move will be up.

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Editor's Note

New Oriental Education was recommended by Cabot China & Emerging Markets Report back in April when it was trading at 46, and it's up 74% since then ... one of the factors that helped make that service the "Best Investment Letter of the Year" in 2007, according to CNBC. You can get regular updates on the stock - and others like it - by taking a no-risk trial subscription to Cabot China & Emerging Markets Report. And if the China boom continues, you'll be glad you did!

To get started, simply click the link below.

http://www.cabotinvestors.com/ecciicwa06.html

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Timothy Lutts can be found on Google Plus.

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