A Q&A with Cabot’s Small-Cap Expert

 
Checking in with Our Small-Cap Expert

Cabot Weekly Review: Unimpressive Action

In Case You Missed It

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First, Happy Valentine's Day! I hope you have a wonderful holiday full of love, flowers and (especially) chocolate.

Second, thank you to everyone who filled out the survey last week. We got an enormous response and I've been busy compiling the results. I'll be answering some of your questions later this month and working on ways we can continue to improve Cabot Wealth Advisory to better serve you.

Third, today I'm bringing you a question and answer session with Cabot Small-Cap Confidential Editor Thomas Garrity. Tom reveals his current market outlook, his advice for investors scared off by the 2008 bear market and how the economy factors into his stock picks. This is part one of a two-part series, so stay tuned next week for the rest of Tom's interview ...

Question: What is your current outlook on the stock market?

Answer: The stock market often reflects people's future perceptions about the health of the economy, so in this case, it can be used as a gauge for the vibrancy of the recovery. However, the rules have changed since the bear market of 2008. The traditionally vital aspects of our economic landscape--consumer spending, housing and employment--are noticeably left out of the current picture.

Given that the economic landscape has changed so drastically, it makes predictions about stock market returns very challenging. Without the usual economic growth indicators, a higher level of risk must be assumed. Any reliable earnings models must account for unprecedented influences that may appear in the future. Future economic activity, and to a certain extent future stock market returns, are at the mercy of the government's fiscal intervention (i.e., the stimulus), since consumers are no longer the driving force. Thus, I think that post-stimulus economic recovery is in progress, but is not yet complete.

Experience has taught us that healthy economies are likely to materialize when the aforementioned growth drivers are in place. Therefore, I believe that the stocks of leading companies in the Dow Jones have already increased more than the economy justifies. I would expect investors to enjoy modest returns in the market as it finds its footing.

Question: What would you say to an investor who has been scared off by the 2008 bear market?

Answer: I think a little fear after what we witnessed in the financial markets is healthy. But investors who are still hoarding cash should be putting it to work. I recommend finding an investing system that best suits your needs and sticking to it to maximize profits and minimize losses.

After the bear market, I've re-evaluated some of my old investing rules and fine-tuned some to reflect changes in the market. I'm advising investors to narrow their investment timeframes and incorporate fewer metrics when forecasting a firm's future. After a particular company has achieved your target price, you can then choose whether to extend your investment in the stock and shift up the fair value of the stock or to exit the position. I think these lessons will allow investors to hit fewer bumps in the road. The economy and market have changed and investors should act accordingly.

Question: How does the economic climate factor into your stock picks and outlook on the market?

Answer: I'm a research junkie, so the company and its industry are foremost in my mind when I'm selecting stocks. However, I have an affinity for stocks that are not bound to economic cycles, so the economy isn't a huge factor. Being invested in small-cap stocks doesn't fully protect me from economic swings, but if I've invested in a young company with the right fundamentals, I stand a good chance of avoiding most of the market-based volatility.

One thing I pay close attention to is the IPO market, which gives me an indication of how much money is flowing into stocks with new ideas. What is key with small-cap stocks is that the product and message line up with the market perceptions, despite economic events. Otherwise, the maturation of such investments will be prolonged and investors will be taking a bigger risk. At the end of the day, I do consider the economy as I pick stocks, but I don't let it affect my decisions too much.

Question: How did small-cap stocks fare last year?

Answer: The Russell 2000 Index was up 27.2%. Our holdings in Cabot Small-Cap Confidential participated in the market's recovery. Some of our top gainers were UQM Technologies (UQM), which shot up 356%, and Acorn Energy (ACFN), which climbed 195%.

Stay tuned next week for the second half of Tom's Q&A ...

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Buy Stocks Earlier and Cheaper

Everyone wants to own the next Microsoft, the next Apple, the next Google, but they don't want to put in the effort to do the research.

The exception is Thomas Garrity, editor of Cabot Small-Cap Confidential. Tom Garrity is a research junkie who delves into the inner workings of a company like no one else we know. For example, his winners in 2009 include these little-known companies:

Abiomed (ABMD), which climbed from 5 to 11.
Acorn Energy (ACFN), which zoomed from 2 to 8.
Silicom (SILC), which climbed from 4 to 10.
Staar Surgical (STAA), which climbed from 1 to 4.
UQM Technologies (UQM), which climbed from 1 to 6.

Buying a small-cap stock with excellent long-term prospects can bring triple-digit rewards that can dwarf the performances of even the best blue chip stocks. In fact, over the past 79 years, small-cap stocks have outperformed large-cap stocks by 165%! So don't miss out on these big gains any longer ... subscribe today!

http://www.cabot.net/info/csc/cscji12.aspx?source=wc01

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Now on to Cabot Market Letter and Cabot Top Ten Report Editor Michael Cintolo's Cabot Weekly Review video. We've gotten a huge positive response from you and we appreciate all of your feedback!

Here's this week's video, featuring Mike's commentary on the stock market's unimpressive bounce this week. Stocks in the video: Telestone (TSTC), Green Mountain Coffee Roasters (GMCR), Dress Barn (DBRN), Baidu (BIDU), Wynn Resorts (WYNN) and Las Vegas Sands (LVS).

http://www.cabot.net/videos/CWR/2010/CWR-021210.aspx

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The Market's Strongest Stocks

Discover the strongest stocks in the market with Cabot Top Ten Report! Editor Michael Cintolo combines our proprietary Optimum Momentum stock-screening tool with his expert growth stock advice to select the top 10 stocks in the market each and every week.

Check out these 2009 one-month, double-digit gainers: Baidu (BIDU) UP 26%, Freeport-McMoRan (FCX) UP 36%, Par Pharmaceutical (PRX) UP 24% and Vistaprint (VPRT) UP 23%, among many others.

Click below to get started today!

http://www.cabot.net/info/ctt/cttkb01.aspx?source=wc01

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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 2/8/10 - Is Toyota a Bargain?

On Monday, Timothy Lutts wrote about investing in Toyota (he’s against it) and the lessons that can be learned from the stock's history. Tim also printed a letter that a reader sent us in response to his issue on Network Neutrality. Tim finished by discussing two attractive medical stocks. Featured stocks: Toyota (TM), Ford (F), Perrigo (PRGO) and EV3 Inc. (EVVV).

http://www.cabot.net/Issues/CWA/Archives/2010/02/Is-Toyota-a-Bargain.aspx

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Cabot Wealth Advisory 2/9/10 - President's Biofuel Push Clears Way for Billions in Revenue

On Tuesday, we heard from Andy Obermueller, editor of Government-Driven Investing at StreetAuthority. Andy discussed how President Obama's biofuel push is paving the way for billions of dollars in revenue--and profits for investors.

http://www.cabot.net/Issues/CWA/Archives/2010/02/Presidents-Biofuel-Push.aspx

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Cabot Wealth Advisory 2/11/10 - Lessons From the Best-Performing Stocks

On Thursday, Paul Goodwin wrote about the lessons that can be learned from looking at the best-performing stocks of 2009. Paul also discussed how he decided that growth investing is the style that suits him best. Paul finished by quasi-recommending a Chinese jewelry stock. Featured stock: Fuqi International (FUQI).

http://www.cabot.net/Issues/CWA/Archives/2010/02/Lessons-From-Top-Performers.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: If you like what you read from Editor Tom Garrity in the Q&A above, you should consider a subscription to Cabot Small-Cap Confidential. Over the past 79 years, small-cap stocks have outperformed large-cap stocks by 165%. So don't miss out on these big gains any longer ... join Tom today!

http://www.cabot.net/info/csc/cscji12.aspx?source=wc01

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Stock Picks

Tesla Motors

If Tesla ever begins to cut back on development and innovation costs, earnings will soar.

Alibaba

China seems to be raising up its very own version of Amazon in Alibaba (BABA.

Facebook

Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.

Cabot Wealth Advisory

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Four Fed presidents gave speeches yesterday, and every word was digested by the stock market in an attempt to better predict the Fed’s next move. With odds of a December rate hike now about even, how should stock investors prepare?Read More >

The Emerging Market Stock You Ought to Own

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The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >