Why the Next Few Weeks Should be Interesting
A Big Potential Turnaround Play
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In my last Cabot Wealth Advisory (dated March 19), I gave you 10 tricks of the trade to help you become a better investor. I also tried to make the point that, when developing your system (you are following a system, right?), you want to base it on how the market ACTUALLY works, and not how some pundit or TV personality THINKS it works.
One point that I've touched on in the past but want to expand on today is the issue of patience. Everyone's heard from their parents that patience is a virtue, and that definitely comes into play in the stock market--in sitting out bear markets, in riding your winners, and in waiting for the proper set-up ... which I'll write about in detail now.
(FYI: The phrase "patience is a virtue" goes back centuries, but from the information I've read online, it's hard to tell exactly where it originated. Most major religions have patience as one of the key virtues, but according to some sources the phrase itself goes back to "Piers Plowman," an allegorical narrative poem written by William Langland before 1387.)
Before diving into why exactly you should wait for your pitch, let me first paraphrase one of my money manager friends (he's also a Cabot subscriber) who has a great analogy for a good system. He plays tennis, and he told me that, like many players, every now and again his shot will hit the top of the net ... and fall over to the other player's side. Point won.
But, as my friend puts it, can you repeat that shot? Of course not. It was more luck than skill; if you were grading yourself, you'd rather have hit a scorching backhand cross-court that moved away from your opponent.
It's similar in the stock market. Yes, there were some investors who bought stocks three weeks ago, and have made good money. They might have bought Citigroup at a buck and Bank of America at 3. But ... can they repeat that trade? Can they use that system to get in at the next bottom, and the one after that?
More often than not, the answer is no--in fact, I would guess that most investors who made money since the market's low in early March have also lost a ton of money in the preceding few months, either by remaining heavily invested, or by trying to catch bottoms during the past year. What I'm interested in is a system that can produce consistent, repeatable results over time.
(Editor's Note: Mike Cintolo, as editor of Cabot Top Ten Report, has been able to refine his stock picking system to uncover the stocks with the biggest potential during any market environment. While he kept subscribers safe during the market's crash, Mike's marketing timing indicators have recently turned more positive on the market, and Mike has already identified the early leaders of the market advance. If you want to know what emerging growth stocks the institutions are putting their money--and hence, where the biggest profits can be had--you should definitely sign up for Mike's Cabot Top Ten Report. Click below to get in early on the leaders of the next advance.)
That leads me to the issue of patience, especially when it comes to waiting to buy the RIGHT stock at the RIGHT time. A couple of years ago, I did a study of many of our past big winners, where we bought them, how we sold them ... all the usual post-trade analysis. However, I also compared our purchases and the stocks' action to our market timing signals. What I found changed my thinking in a big way!
Specifically, it turns out that most of our big winners--and even most of the winners we didn't own, but were following--began their period of greatest price performance two to four weeks AFTER our market timing indicators turned bullish. And remember that our market timing system is based on trend-following, so we usually don't get buy signals until a couple of weeks after the market itself has bottomed.
Translation: Most of the market's biggest winners get going in a real powerful way four to six weeks (a couple of weeks for a buy signal ... plus another two to four weeks after that) after the market has bottomed. Many times, the investor who rushes to be the first to buy after the market bottom will miss out on the real leaders, instead buying what he thinks are the real leaders. I've fallen prey to this myself.
Back in the spring of 2007, we got a new buy signal in early April. One of the strongest stocks at the time was FEI Corp. (FEIC), which had a great story (it was making some very complex life sciences imaging equipment) and good numbers, and I recommended it to subscribers. But the stock stalled out, headed south, and we sold it for a small loss a few weeks later.
Then there was First Solar (FSLR), which I also recommended at the same time as FEIC. While it meandered higher for a few weeks, the stock sank right back down to our buy price four weeks after our initial recommendation. It took off to the upside after that, and went on to be one of the year's biggest winners, rising nearly five-fold for us. But note that the stock didn't make any progress for a full month.
Fast-forward to today, and you have everyone tripping over themselves to beat the rush. Worse, many investors who have yet to get heavily invested feel like they've missed the boat. Not true!
I believe that even if you're 100% in cash right now, you're still in a great position ... assuming you're busy putting together a Watch List for your upcoming buying spree. Since we're about four weeks from the market's bottom, history tells me that most of this market upmove's biggest and most lucrative winners are still on their launching pads ... but could lift off soon (maybe during the upcoming earnings season).
So now is a great time to do some homework and get ready to latch on to the leaders!
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My wife and I have been actively house hunting in recent weeks, and believe it or not, we actually put in our first offer yesterday. We'll see how it goes--the house just came back on the market (after being on for much of last year) at a drastically reduced price. We're not sure how much the seller is willing to budge.
But I'm not telling you this just to babble about my life. What surprised us as we began shopping is that the housing market is, well, pretty strong, at least in the Boston area. I'm not saying prices aren't falling, or that sellers aren't taking some discounts to their asking prices. All of that is still true. But of the 15 to 20 houses we've seen either with our Realtor or at open houses in the past three months, I would say all but two or three have sold.
How is this possible? I think there are a lot of people out there, like my wife and I, who have been holding money on the sideline and have been waiting to pounce. Now that prices are off 20% or so and mortgage rates are hovering around 5%, buyers are coming back.
All of that leads me to Fidelity National Finance (FNF), a turnaround story. I much prefer growth stocks, but this company is the biggest title insurer in the country, thanks to a couple of recent acquisitions. And while it lost money in 2008, it's already seeing greatly increased activity, and analysts see earnings surging back into the black this year. Here's what I wrote about FNF in a recent issue of Cabot Top Ten Report:
"Thanks to a recently completed acquisition, Fidelity National Financial is the nation's largest title insurer by market share, and that's the main reason for the stock's strength today. While the housing market remains in a downtrend, there have been many signs that the overall number of transactions (thanks to lower mortgage rates and lower housing prices) is beginning to trend up. True, lots of that is because of distressed sales--foreclosures, short sales, etc.--but to a title insurer, what matters most is volume, not housing prices. Fidelity National has been aggressively cutting costs, chopping 27% of its workforce and closing many offices of its recently-acquired businesses, which will help earnings going forward. And management is optimistic--even back in December and January, order flow was double what was seen during the post-crash November doldrums, and with the Federal Reserve's actions (purchasing hundreds of billions of dollars of Treasuries and mortgage backed securities in the months ahead) this company is poised to thrive. Analysts see earnings rebounding to $1.55 a share this year, and we think that could be conservative."
Even if the recent uptick in housing sales is because of distressed properties, which has been the case, that will still help a company like Fidelity National. FNF recently zoomed ahead from 14 to 21 on heavy volume, and has consolidated the past week around 20. I think it's a decent buy around here, with a tight stop in the 17 to 18 range.
All the best,
P.S. If you want to read my March 19 Cabot Wealth Advisory (or any of our other past issues), go to the archive on our Web site. There you will find my 10 tools for your investing toolbox as well as all of the other issues that I and the other editors have written. Check it out today!