A New Way to Examine Your Portfolio
One thing that's always attracted me to the stock market is that it has a long and storied history. In fact, I vividly remember, when I first began working for Cabot back in 1999, eating lunch at our firm's picnic table every day and re-reading 30 years of Cabot Market Letters, which we have archived in the office.
Of course, as a history buff, my first move was to go back and look up all the dates of major, jaw-dropping events--the 1973-1974 bear market, the 1982 blast-off, the 1987 crash, the 1990 bear market and others. Reading the Letters from these years was like taking part in an adventure ... without any financial risk, of course!
One of the most discussed themes in market history has to do with October--specifically, that October is a month that the market crashes. And, unlike a simple myth, there's a lot of truth to the "October crash" crowd. The 1929 and 1987 implosions remain forefront in investors' minds, but there have also been numerous other October wipeouts, including the 550-point Dow drop in 1997, the 1998 Russian Ruble/Long-Term Capital Management debacle, and, of course, last year's acceleration of financial panic from late September.
But as we know, the market is a contrary animal, and it's succeeding in that respect once again. As it turns out, October's history is nearly the exact opposite of what most investors believe!
Since 1958, October is actually the sixth-best month, right in the middle of the pack, with a 0.9% average gain for the S&P 500. (For the record, September and February are the two worst months of the year, on average.) Sixty percent of all Octobers have finished on the positive side of the ledger.
Moreover, instead of a month that ushers in crashes, October is actually a month that ends them. According to Stock Trader's Almanac 2009, October has marked the end of the 1946, 1957, 1960, 1962, 1966, 1974, 1987 (the decline actually started in August of '87), 1990, 1998 and 2002 bear markets. In my opinion, it also marked the end of last year's collapse, as the broad market bottomed in October (when 88% of the NYSE hit new 52-week lows).
Also, looking ahead, the months of November, December and January are three of the four best months of the year (April is the other). Thus, far more often than not, October is a month to buy, not sell!
With that all said, I'm not a huge believer in predicting what will happen this year--maybe the market is topping out here and is set for a big slide, or maybe the market will keep trending higher throughout October. My preference is to let the market decide and to interpret its decision with our indicators.
Right now, the intermediate- and longer-term trends are pointing up, and the broad market remains exceptionally healthy, so the odds favor higher prices ahead. But the point is that, despite all the spooky legends, October is far more likely to offer treats than tricks.
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Markets Have Best Quarter Since 1998
The stock market recently had its best quarter since 1998--with the Dow and the S&P 500 both surging 15%! There's never been a better time to invest.
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I wanted to write a bit about portfolio management before getting to my stock pick for this Cabot Wealth Advisory. Don't worry, though--this won't be any of the nitty gritty that I often write about. Instead, I just wanted to outline a rough "position sheet" that's relatively easy to set up on a spreadsheet, but can also give you a great view of your portfolio's risks and rewards.
The inputs are simple: Stock, purchase price (include commissions!), current price and stop-loss price. This stop-loss can be a standing order with your brokerage house, or a mental stop that you will adhere to. The key is to have a stop-loss level for EVERY stock you own. That doesn't mean you won't hold a stock for many months, but it does force you to think about where you'd sell your stock if things went awry.
With this data, you can easily calculate three key numbers.
First, of course, you can calculate your current profits and losses in all your stocks. Nothing revolutionary there; your brokerage house probably does that for you anyway.
Second, you can calculate all your potential profits and losses. Let's say you bought a stock XYZ at 50, and now it's 55--i.e., you have a 10% profit. But your stop-loss is still at 45 ... a 10% loss. Looking at your potential profits and losses will force you to keep your feet on the ground (because an unrealized profit is just that ... unrealized) and think about raising your stop.
Third, you can calculate your potential "drawdown." It's very similar to step two, but in this case, you're examining your whole portfolio. Basically, you're asking yourself, "If all my stops were triggered tomorrow, how much would my portfolio go down? And how much would I still have left?"
It's pretty easy to calculate. Using the above example with stock XYZ, your risk is 10 points--from the current price of 55, all the way down to your stop at 45. If you own 100 shares you have $1,000 of potential drawdown (10 points, multiplied by 100 shares) for that one stock. Doing this for all your holdings and adding them up will give you your total drawdown potential.
Lastly, you simply add up all those figures, and subtract them for your current portfolio's total value. That is your "worst case" scenario that tells you what you'd generally be left with if everything hit the fan at once.
Why go through this number crunching? The major benefit is that it forces you to watch your risk in a systematic way--something few investors ever do. Most investors only dream of the upside and shrug at the potential downside.
Try putting together a position sheet for yourself and update it a couple of times per week. It might offer you a new perspective of your portfolio!
(Editor's Note: Mike Cintolo, as Vice President of Investments for Cabot, will be holding an Internet seminar on Thursday, October 8, in which he'll discuss many technical rules of thumb, including how to spot big movers ahead of time. He'll also discuss his market outlook, favorite indicators, stocks and groups, highlighting his very best ideas, as well as taking questions from attendees. If you'd like to learn Mike's secrets of success, and find out his top picks, click below.)
For my stock pick today, I'm going to go with a decidedly unexciting story ... unexciting, that is, to the naked eye. I'm talking about NBTY, Inc. (NTY), a worldwide leader in the manufacturing and distribution of vitamins. Like I said, not terribly exciting, but as it turns out, business is rebounding sharply.
The company sells more than 22,000 vitamin products through its 528 stores (442 of which are Vitamin World stores, with the others split among different brand names), as well as online and through other distribution channels. The big growth here is in the firm's U.S. Wholesale division, where sales rose 40% in the second quarter. Overall revenues, including all divisions, were up a healthy 22%, with earnings up 25%.
But the exciting part is coming. Earnings are projected to soar 193% this quarter and 32% in the fiscal year ending next September. Those estimates have recently been bumped up as the last two months have seen NBTY, Inc. record sales growth far faster than expected. Moreover, the stock is trading at just 12 times those likely lowball estimates, so value buyers could be interested.
As for the stock itself, it's rallied eight weeks in a row two separate times this year, a sign of persistent institutional demand. And, after gapping up hugely following its second quarter report, NTY has traded very tightly during the past few weeks just south of 40. With good support in the mid-30s, I think the stock is buyable here with a close stop just under 36 or so.
All the best,