Where to Invest Now: Small-Cap Stocks

Featuring Lutts' Logic:

Pirates ... Once More

Swine Flu

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Three months ago (January 26), I wrote a Cabot Wealth Advisory titled, "Pirate Law - Why Don't We Just Shoot Them?"  I learned a lot researching it, but readers didn't seem to care much; at the time, maritime piracy wasn't an issue affecting Americans directly.

Now, however, thanks to the four young Somalis who attacked--but failed to capture--the Maersk Alabama, we have a real live pirate sitting in jail in New York City--the same city that's locked up Bernie Madoff.  And what's interesting to me now is how this pirate trial will play out.

It's highly unlikely the trial of Abdulwali Muse will diminish pirate attacks in Somalia; the surest cure for piracy is a stable government that can enforce the rule of law and patrol the country's own waters.  Next-best is what's going on now, the increasing use of Kenyan courts to deliver real justice.

But I'm guessing the U.S. Federal authorities chose to bring the young pirate here because someone high up thought that clearing the cobwebs from our legal system regarding piracy would pay dividends in the future.  It's been a very long time since maritime piracy was prosecuted in the U.S., so we're a little rusty on the whole issue.  And better to warm up with one Somali who inflicted no serious damage on his victims than a boatload who manage to achieve far more.

Plus, it provides a great intellectual exercise, so I look forward to it.  And if the whole matter concludes--perhaps years from now--with the U.S. and other nations having more legal authority to shoot at pirates, I wouldn't mind.

Some laws need to change to adapt to modern realities, just as some defenses do.  For example, when Joshua Slocum sailed around the world alone between 1895 and 1898, he thwarted nighttime interlopers off the coast of Tierra del Fuego by spreading carpet tacks across the deck, "commercial end up."  It's a good strategy when your enemy has no shoes but not when they carry AK-47s.


In general, I like it when bad economic news is pushed off the front page by something new, whether it's Jacoby Ellsbury stealing home for the Red Sox to help them sweep the Yankees, or Swine Flu, the menace du jour.  Before panicking about the latter, however, I recommend a little perspective.

To date, about 100 people in Mexico have died from Swine Flu or its complications.   By comparison, the CDC estimates that 36,000 people in the United States die each year of influenza-related illnesses.  We've become accustomed to that risk.  Some of us get vaccines; some don't.  But we don't obsess about it, and neither should rational people allow fears of Swine Flu to disrupt their lives.

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Turning to the market, we've now enjoyed seven consecutive weeks up, and we're still optimistic that higher prices lie ahead.

Granted, major challenges remain for the U.S. economy, particularly in the auto industry, the banking industry and the housing industry.  But remember, the market is always looking ahead, and its actions in recent weeks convince us the worst has already been discounted.

The theme of earnings reports in recent weeks has been "Not as bad as expected," like Ford losing "just" $1.8 billion in the first quarter.  (Man, that's hard to write with a straight face.)

So where do you invest?

One area I like today is small-cap stocks.

Over the past 79 years, small-cap stocks have outperformed large-cap stocks by 165%, and I think their prospects are especially terrific now; historically, they perform best following a bear market.  My sense is that the old blue chips will continue to be hobbled (like Ford and General Motors) by their expensive old overhead, while their stocks will continue to be weighed down by institutional investors slowly easing out on rallies to invest in faster-growing small companies with greater potential.

Admittedly, to invest in small-cap stocks you've got to endure more volatility.  Small-cap stocks are generally low-priced and thinly traded, which means the stocks tend to swing up and down viciously.  But for the patient investor who can buy right and hold for the long term, the results can be very satisfying.

Consider, for example, Cabot Small-Cap Confidential, our service that recommends one high-potential small-cap stock every month.

Since the March market bottom, while the Dow is up 24% and the S&P 500 is up 28%, the stocks currently recommended by Cabot Small-Cap Confidential are up 37%!

I can't tell you a lot about these stocks because their names are ... well ... confidential.  We allow only 500 subscribers to Cabot Small-Cap Confidential because we want to avoid having an excessive impact on any stock.  We don't want our subscribers' buy and sell orders pushing these stocks around.  We think subscribers are better served if a stock moves ahead on its own merits.

But I can give you an idea of the types of stocks subscribers are buying ... and holding.

One is a company developing artificial bone products that are in growing demand by orthopedic surgeons.  When editor Thomas Garrity recommended the stock last October, he wrote, "XX is the most widely used synthetic bone graft material in the United States. Numerous clinical trials have proven XX to be a cost effective synthetic alternative to BMP-enhanced and autologous bone grafts.  XX's best success has been in the treatment of vertical compression fractures, where bone grafts are needed to fill cavities in the spine, but it can be used pretty much everywhere but the head and ribcage.  XX's primary claim to superiority is the fact that its structure and chemical composition provide a paradise for the creation of new bone.  Building new bone on XX is like building a house on a concrete foundation in a flat, clear lot instead of on a rocky, wooded hillside."

Since then, the stock is up 23%.  Most recently, it's been building a long base around the 3-dollar level, preparing for a new upward run.
Another recommendation is a company that's developed ultra-efficient drug delivery technologies that enable patients to easily get specific drugs into the bloodstream--instead of letting them languish in the inhospitable environment of the stomach.  Its method involves a patch that's affixed to the inside of your cheek, so that the drug quickly--in five to 10 minutes--is carried through the mucous membrane of the cheek and into the blood system.  The first use of the patch will be delivering pain medication to cancer patients.  When Tom recommended this in November, he wrote, "XX has a much lower propensity for abuse as it can't be crushed or snorted like drugs designed for nasal and pulmonary delivery.  Furthermore, XX has demonstrated linear drug absorption across various pH levels, a good omen.  For these reasons, we believe that XX, once approved, will enjoy a very rapid ascension to a leadership position in the $20 billion pain market."

Since then the stock has gained 87%.  It's a little high now, short-term (in my opinion), but the long-term future is still very bright.  Tom, as always, is looking at the long-term.  

And so should you, if you chose to invest in these stocks.  The beauty of buying these stocks early and holding on is that you benefit from the buying of institutional investors later, a factor that can push these stocks up fast.

Plus, you'll benefit from the growth of the medical industry (editor Thomas Garrity's favorite sector) in the years ahead.

If you're looking to buy low, hold for a long time, and sell for big profits, I urge you to try a no-risk trial subscription now.  Thanks to the recent bear market, we now have a handful of openings for new subscribers.  A new recommendation comes out this week, and I'd love you to have it.

To get started with a no-risk trial subscription, simply click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

P.S. To read my January 26 Cabot Wealth Advisory about pirates, or any other past issues, just go to our Web site archives: http://www.cabot.net/Issues/CWA/Archives.aspx


Timothy Lutts can be found on Google Plus.

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