In His Own Words
In Case You Missed It
The #1 request Cabot has had over the years has been to find great stocks sooner and with our publication Cabot Small-Cap Confidential, we're able to do that. Cabot Small-Cap Confidential, a limited subscription newsletter, focuses on finding undervalued and little-known small-cap companies that are poised to break out in a big way.
Or, I should say, the publication's analyst and editor, Thomas E. Garrity, is able to find winning stocks sooner. Tom is a lifelong investor; he has been a stockbroker, stock analyst, venture capitalist and portfolio manager. His long career and varied experiences taught Tom to make investments only when the potential rewards outweigh the risks. He applies this philosophy to every stock he recommends in Cabot Small-Cap Confidential.
Tom searches for paradigm shifts that are opening up new opportunities and he invests only when the market opportunity is huge. This is Tom's Law of Large Numbers, which means that he only selects companies that serve large, burgeoning markets. One of the keys to Tom's success is investing in companies before institutions notice them. This allows subscribers to buy stocks more cheaply and enjoy the ride up when institutional investors push the stock higher as they get on board.
Tom has developed a disciplined investment methodology using a series of qualitative and quantitative metrics that are evaluated for each company under his investment consideration. The company's products must target large markets, the science or technology must be proven, the balance sheet must be strong enough to support research or investment activity, and the idea must be strong enough to attract future institutional investment.
Tom's analysis results in a portfolio of companies that are pioneers in their industries ... and, in many cases, are creating industries of their own! Because these stocks have little or no institutional or research coverage, Cabot Small-Cap Confidential subscribers can acquire significant positions in these companies more cheaply than if the stocks were widely followed.
Thus, Cabot Small-Cap Confidential is best suited to experienced investors seeking big opportunities in little-known, undervalued stocks that have the potential to explode.
Tom does extensive research about each of the companies he selects, as well as keeping up on what the institutions are buying. This gives him a sense of what industries the big boys are looking at and what might become interesting to them in the future.
Interestingly, Tom looks for stocks that offer both growth and value. This means he wants stocks that offer growth-oriented ideas but are undervalued in the market. Along with this, Tom looks to invest at the right time in the product cycle, as this can greatly affect the growth potential of the stock.
The stocks in the portfolio are held for varying lengths of time based on their performance. It often takes time for these stocks to mature so patience is necessary.
Over the past 79 years, small-cap stocks have outperformed large-cap stocks by 165%, and their prospects are especially terrific now; historically, they perform best following a bear market. 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 enormously rewarding.
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%!
Editor Timothy Lutts recently wrote about one of the stocks Tom Garrity is currently recommending:
"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."
So as you can see, the profits may not come in overnight but when they do, they come in droves.
Included in a subscription to Cabot Small-Cap Confidential is the monthly newsletter, available by email or postal mail, with one heavily researched and detailed stock pick as well as updates on previously recommended stocks. Subscribers also receive a weekly update of the stocks every Friday, VIP access to our Web site and the opportunity to email Tom with questions.
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From the market's bottom in March 2003 to the recent low in March 2009, the S&P 500 lost 18% in total and the Nasdaq lost 3.5%. Cabot Market Letter, however, left them in the dust: Advancing a total of 94% during the past six years (nearly 12% per year).
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Now for a Q&A with Cabot Small-Cap Confidential Editor Tom Garrity, so you can read, in Tom's own words, why he's so passionate about small-cap stocks.
Question: Why do you prefer to invest in small-cap stocks? What benefits do they offer investors?
Answer: The obvious reason for investment in small-cap stocks would be that they have a proven and long history of outperforming all other asset classes. The last statistics I saw on the performance of small-cap stocks showed that during a 79-year period, returns on small-cap and micro-cap stocks have outperformed large-cap stocks by 165% and 437% respectively.
As the U.S. enters a new chapter, I believe that investments in small-cap stocks will be better positioned to deal with the economic uncertainty that lies ahead. We know now that bigger doesn't necessarily mean better. The best investment choice is the one that's most likely to be nimble and adapt to change, and for this reason I feel that small-cap stocks have a distinct advantage.
Question: What would you say to an investor who has been scared off by the bear market?
Answer: It's OK for investors to be scared off by a bear market as long as they are using their time on the sidelines to look for bargain stocks that have been sold off undeservingly. Always have a Watch List, in both good times and bad, so that when your favorite stock goes on sale, you can make a purchase. If you don't have an immediate need for your funds for retirement or another near-term obligation, you should put that sideline capital to work for you. Investing should closely approximate your risk and comfort level. If the stock market makes you feel uneasy, then putting your money in cash is a good choice. When you do decide to re-enter the market, stock selection will be even more critical than your timing was to get out of the market.
Question: How does the economic climate factor into your stock picks and outlook on the market?
Answer: As always, I'll be sticking to finding companies that are leaders in their businesses. The only difference given the current market is that I may alter the selection criteria a little. Analysts typically look out three to six months or 12 months and longer to determine a stock's valuation. In the coming year, I'll still base my target prices on earnings power, but my range of expectations for the future value of those potential earnings will be shorter. I'll also be screening investment candidates for any debt, and favor those that have cash and liquid assets. I'll continue to focus research efforts on industries that are less constrained by discretionary spending.
Investors' patience was tested last year and confidence in the stock market is limited. Therefore, there's no reason for institutions to take on higher risks than are warranted. In light of this new paradigm, investors should revisit the old investment principles, balance sheet risk and near term profitability.
Question: What else you would like to say to subscribers regarding small-cap stocks?
Answer: Small-cap stocks will continue, in my view, to be the superior investment over time. Every great company that starts out small in business and eventually flourishes to become a large company has origins in venture capital. Somewhere along the line, private investors provided the necessary funding for the company to grow. Investors will continue to pay for growth, as that's true the spirit of investing. The markets may re-evaluate what financial metrics matter most for stock selection, but growth will always be in style.
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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.
Cabot Wealth Advisory 4/28/09 - Pirates, Swine Flu and Small-Cap Stocks
On Monday, Timothy Lutts wrote about the issue of modern maritime piracy and what happens when bad economic news gets pushed off the front page by things like the swine flu. Tim wrote about why small-cap stocks are a great investment choice right now, especially following the recent bear market.
Cabot Wealth Advisory 4/30/09 - IPOs, Summer Reading and Earnings Season
On Thursday, Michael Cintolo wrote about two IPOs that could turn into future market leaders and why he's happy to see the IPO pipeline coming back. Mike also wrote about some of his favorite investing books that would make great summer reading. Mike finished by discussing three stocks, two that already reported earnings and one that will be soon. Featured stocks: Changyou.com (CYOU), Rosetta Stone (RST), Amazon (AMZN), Visa (V) and Coinstar (CSTR).
Cabot Wealth Advisory 5/1/09 - Starbucks in Your Home
On Friday, Timothy Lutts wrote about finding the truth among several different polls all relating to Obama's approval rating after his first 100 days in office. Tim also briefly discussed Chrysler's bankruptcy filing. Tim finished by writing about the trend in coffee stocks right now. Featured stocks: Starbucks (SBUX) and Green Mountain Coffee Roasters (GMCR).
Until next time,
Editor of Cabot Wealth Advisory
Editor's Note: Cabot Small-Cap Confidential just released a new recommendation this week and I'd love for you to have it. And if you sign up for a subscription now, you could be reading Tom's detailed fundamental analysis of his investment pick very soon. Subscriptions are strictly limited to 500, but we have a few spots available right now. So don't delay. Sign up today!