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Profit from the January Bounce

Buy beaten down growth stocks priced under $10 in late December, and sell them a few weeks later, after their early January bounce. It's that simple! The trick is selecting the right stocks. You can try to choose them yourself, but we recommend that you rely on Cabot's 10 Favorite Low-Priced Stocks for 2011. Order your copy in time for the new year!


As I mentioned last week, I recently collected the responses from the survey found at the bottom of each issue of Cabot Wealth Advisory. Many of you have taken the time to fill it out and I appreciate all of your feedback.

The same questions came up again and again, so for the next few weeks, I'll be going over those topics. Today, I'm going to discuss something that came up frequently: beginning investing.

Many of our readers are already experienced investors, but a lot of you are completely new to the game. So today I'm going to attempt to get the new folks up to speed in the hopes that having more basic knowledge will give you the tools you need to better understand what we write about. (Note: These lessons primarily apply to growth investors, but they can be beneficial to everyone's investing strategy.)

Why should you own stocks?

Over the long term, stocks have outperformed all other investments. From 1926 to 2008, S&P 500 stocks brought investors an average annual return rate of 9.6%. Stock ownership entitles you to benefit from price increases and to receive dividends the company distributes.

How many stocks should you own?

We generally recommend owning no more than 12 stocks. That allows winners to truly have a big positive effect on your portfolio, while at the same time preventing losers from sinking it completely. We advise investing equal dollar amounts in each stock to balance risk.

How does Cabot pick growth stocks?

Cabot's growth stock selection system starts by focusing on stocks that are strong and going up faster than the general market. These stocks are said to have positive momentum. But we need to see more than that. Behind each stock, we want to see a great growth company. In most cases, we require a company to be demonstrating strong growth of both sales and earnings. And we want to find a story that convinces us this great earnings growth is likely to continue in the years ahead. This system is followed in Cabot Market Letter, Cabot Top Ten Weekly, Cabot Green Investor and Cabot China & Emerging Markets Report.

What is relative performance?

Relative performance (RP) is a measurement of how a stock is acting relative to the market as a whole. It is one of the tools used by Cabot growth stock analysts to gauge a stock's momentum. When a stock's RP line is moving upward, the stock is performing better than the general market; when the RP line is moving downward, the stock is performing worse than the market; and when the line is level, the stock is performing the same as the market.

What is market timing?

We are strong believers in long-term market timing, mainly so we can sell stocks and raise cash to avoid losing money when the broad market enters into a major decline. Market timing is not an exact science, but we've had great success timing the market over the years so we feel confident in recommending that all growth investors practice it. Our three primary market timing indicators are Cabot Trend Lines, Cabot Tides and the Cabot Two-Second Indicator.

The Cabot Market Letter averages one major market-timing signal per year. If it's a sell signal, we work to reduce risk by selling our poorest performing stocks and putting close limits on the others. The object is to reduce the risk of loss and to raise cash for the next buy signal, when bargains abound. When that buy signal comes, we invest aggressively in the best-performing stocks we can find. Interestingly, that's the time investors are most fearful!

How do I know when to sell a growth stock?

The most important rule in growth investing-and the hardest to learn is, "Cut your losses short." That means if your loss in a growth stock exceeds 15% (in a bear market) or 20% (in a bull market) at the end of any trading day, you sell. Period. In general, we also believe it is wise to sell a stock when it has underperformed the market for eight weeks. The stock's RP (relative performance) line is a good indicator of this.

On the other hand, you will have many winners, and knowing when to sell them is more difficult. These are stocks in which you already have doubled your money--or more, and still see the potential for great appreciation in the future. In such cases, you should hang on to your stock through corrections, confident that the long-term results will prove rewarding. If you can do this, you'll benefit mightily from the magic of compounding.

Is it risky to buy stocks hitting new highs?

In the long run, no, because a trend, once established, tends to persist. So if a stock's trend is up and you're convinced the company is capable of great earnings growth in the years ahead, you should buy. But better yet is waiting for a normal correction, and buying a stock when it touches its 25-day moving average.

What are options?

An option gives you the right to buy or sell shares of a stock if it reaches a specified price by a set date. This summer, Cabot introduced a new publication, Cabot Options Trader, for investors eager to trade options. Editor Rick Pendergraft is scheduled to write an issue of Cabot Wealth Advisory later in the month, so stay turned to learn more about options.

Which Cabot newsletter is right for me?

In addition to Cabot Wealth Advisory, which is free, Cabot publishes 10 other newsletters covering a variety of investing strategies. We understand that it can be difficult to decide which one best suits your investing needs, so we created a quick quiz. You can take it here.

That's all for today. I hope you learned something that will help you become a more successful investor. Again, thanks to everyone who filled out the survey ... expect to see more topics pulled from the results in the future!

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Get Our Top Dividend Picks for 2011 Free

Get the best high-yield ideas from the best minds on Wall Street with Dick Davis Dividend Digest. Subscribe before January 2 to receive our Top Dividend Picks for 2011 Special Issue FREE when it's released on January 5. Just check out some of last year's winning picks:

Walt Disney Company (DIS): UP 19% (Yield: 1.10%)
DWS RREEF World Real Estate (DRP): UP 27% (Yield: 6.40%)
Linn Energy (LINE): UP 32% (Yield: 9.00%)
Coach (COH): UP 46% (Yield: 0.80%)
Magic Software (MGIC): UP 200% (Yield: Varies)

And there's a lot more where those came from. Don't delay, this offer won't be around for long. Get started today!


In this week's Stock Market Analysis Video, Cabot Market Letter Editor Mike Cintolo says that the market indexes continue to trend higher and that we're still in a bull market. However, he says that underneath the surface, we're starting to see some signs of worry and deterioration, causing some leaders go by the wayside. Stocks discussed include Baidu (BIDU), (PCLN), Netflix (NFLX), Chipotle Mexican Grill (CMG), Ford (F), (AMZN), RF Micro Devices (RFMD) and Gentex (GNTX). Click to watch the video!

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Turn Market Volatility Into Huge Gains

Leverage your investments to make money in all markets! Cabot Options Trader Editor Rick Pendergraft uses the market's volatility to bring his subscribers huge profit-making opportunities. Just check out these gains from the last three months:

A 109% gain on a Call on Pride International (PDE) in only 15 days!
An 88% gain on a Put on Arcelor Mittal (MIT) in 13 days!
A 70% gain on a Call on Linear Technology (LLTC) in 14 days!

Join today!


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, there are links below to each issue.

Cabot Wealth Advisory 12/13/10 - Two Great Insurance Stocks

On Monday, Timothy Lutts discussed opportunity versus security. He recommended two value stocks in the insurance business. Tim also discussed Cabot Market Letter's 1,000th issue and excellent track record. Featured stocks: Aflac (AFL) and Reinsurance Group of America (RGA).


Cabot Wealth Advisory 12/14/10 - This may be the Only Sure Way to Play Real Estate

On Tuesday, we featured an article by Amy Calistri of StreetAuthority on recent real estate trends and how you should invest to profit from them.


Cabot Wealth Advisory 12/16/10 - My Economic Predictions for 2011

On Thursday, Paul Goodwin discussed where he thinks the economy could be headed in the new year-and why we don't really put too much stock in what we think is going to happen, preferring to let the market lead the way. Paul also discussed a recent Chinese IPO that's been hot since its debut. Featured stock: Dangdang (DANG).

Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

P.S.  You read our newsletters, now show us some love on Facebook! Go to our page to "like" us.

Stock Picks


This stock could rise 50% before becoming fairly valued.

This hot technology company is growing like a weed, thanks to products that speed up cloud communications.

This stock is somewhat well known, but far from well loved.

Cabot Wealth Advisory

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