Time for Some Supervision
Should You Buy this Chinese IPO?
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I got a question from a subscriber recently asking for my opinion about a book called Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. What I had to tell him was that I don’t really have an opinion because I haven’t read the book. And probably won’t.
I also didn’t read Surviving the Coming Mutual Fund Crisis: How You Can Take Defensive Measures to Protect Your Money, which was published in 1994. Nor did I read Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression published last year or The Ultimate Depression Survival Guide: Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times.
So why am I not staying up late reading these books whose titles hold out the promise of survival in the meltdown/crisis/crash/depression that’s threatening to bury all of us?
Partly it’s because of my (perhaps cynical) suspicion that one sure way to prosper from a financial crisis is to write a book about how to prosper during a financial crisis.
And partly it’s because I suspect that the intricacies and vagaries of any real crisis that actually develops will probably come from an unexpected quarter that will render any advance planning irrelevant.
With all that said, I’m certainly not trying to discourage anyone from preparing for adversity. That’s what the Cabot sell disciplines are all about.
Using the Cabot rules, the most you should ever allow any stock to fall before selling it is 20% below your buy price. That’s using the price at the close of the trading day, not an intraday price. And it’s also a maximum loss; there’s nothing that says you can’t sell sooner if the stocks’ price decline looks threatening.
If markets are in a downtrend, you should shorten that loss limit to a maximum of 15% below your buy price.
And that, in a nutshell, is the Cabot response to the books, articles, blogs and other postings about the cataclysmic disaster to come.
If you’re skeptical about how simple it all is, I have a question for you. If you decided to sell all your stocks, how long would it take you?
Assuming that your online broker is pretty much like my online broker, that answer is probably less than 10 minutes. You just hit “liquidate position” or “sell” or whatever the website tells you. Sure, it may take longer for the trade to actually execute (especially in a thinly traded stock), but you can be essentially out of the market in less than one cable news cycle.
So, unless you’re a much bigger investor than most, or have all your holdings in a 401(k) or SEP-IRA that prohibits you from going to cash, you can reduce your exposure to the stock market to zero in less time than it takes to read this Cabot Wealth Advisory.
So why the heck should you care what the market is going to do next year or next quarter or even next month?
Selling is never easy. Well, actually that’s not true. Selling is easy; it’s making the decision to sell that can be excruciating.
But if you can’t sell your stocks when they need to be sold, you really can’t succeed as an investor in individual stocks.
I use a pretty simple market-timing indicator to tell me when the intermediate-term trend of the Chinese stocks that trade on U.S. exchanges is up or down. And I’ve used this indicator, which we call the Cabot China-Timer, to reduce the Cabot China & Emerging Markets Report’s exposure to stocks when the markets get stormy.
In fact, I had the Report’s portfolio 100% in cash during much of the Great Recession of 2008.
And if you want my advice about how to survive “the Coming Collapse/Crisis/Meltdown,” that’s it in a nutshell. Selling and holding cash is like sitting inside in front of a warm fire when there’s a storm raging outside. You should try it.
And if you’d like to have my help in figuring out what and when to buy and when to sell, you can get a no-risk trial subscription to the Cabot China & Emerging Markets Report.
It’s the holiday season, and I certainly don’t want to fall from my usual level of taste and decorum in this season of joy and good feeling.
But I just can’t get the image out of my head that the global banking industry is like a car full of frat boys who have been enjoying massive amounts of beer and pepperoni pizza. And now they’re out driving around, worried about two or three of their number who are showing signs of dealing with overindulgence in the traditional method of college boys everywhere … that is by hurling their guts out.
The gluttonous banker-boys in the U.S. required an enormous dose of medication to calm the aftermath of their spree, and the world has watched with nervousness and dread as Greece and now Ireland have joined the ranks of the bailed out.
(As someone who has actually been in a car with a group of guys like queasy time bombs stuffed with beer, pizza, whiskey, pork rinds, Southern Comfort, sliders and—a nice touch I thought—cupcakes, I have a real feel for the unpleasantness of the results. I was the driver, by the way.)
I don’t want to belabor the point. I’m just saying that anyone who wants to argue that the financial industry knows how to police itself, and shouldn’t be regulated by the government will find a very willing debate opponent in me. I know what happens when a bunch of young guys decide to see how much they can eat and drink.
Trying to decide whether a new IPO will be a winner just after it comes public is a tough job. Sure, you have some information about the company’s sales and earnings before its IPO, so it’s not like trying to decide whether a newborn baby is going to grow up to be a CEO or a burger flipper. But it’s much harder to gauge the potential of a stock that doesn’t have a chart to show how well it’s being received by investors.
I look for stocks with a good combination of Story, Numbers and Chart, which translates to 1) an appealing business proposition with huge growth potential, 2) strong fundamentals in the form of strong revenue and earnings growth, and 3) a chart that shows an increasing appetite on the part of investors for the stock.
BitAuto (BITA) came public on November 17, and has been trading between 12 and 14 in the days since. So there’s certainly no evidence that BITA was an issue investors had been panting for. That knocks Chart out of the picture.
And the Numbers for BitAuto haven’t been especially impressive. In the company’s short life, it has had more years with losses than profits. And in the four most-recent quarters, the company has reported four losses, including losses of 91 cents per share in the most recent three. You have to decide whether the three quarters of 56% gains in revenues are hopeful enough to counterbalance the losses.
That leaves the Story to carry the water for BITA, and it’s a pretty good one.
Investors have been looking for a way to play the Chinese automotive industry for years now, and BitAuto offers a new approach. The company offers online marketing services to both new and used car dealers. Dealers can set up online showrooms and supply price data, videos and inventory for potential buyers. BitAuto can also help with the dealers’ marketing efforts.
Everyone agrees that auto sales in China, which have already surpassed those of the U.S., will only grow in the future. China has put staggering amounts of capital into building a great highway system, and the appetite of the Chinese people for cars isn’t in doubt.
The question is, will new and used car dealers hire BitAuto or do it themselves?
The Story is strong enough to put BITA on my Watch List, but it can’t produce a buy recommendation all by itself. Keep an eye on this young, high-potential issue.
For Cabot Wealth Advisory
Editor’s Note: Paul Goodwin is the Editor of the Cabot China & Emerging Markets Report, which Hulbert Financial Digest ranked the #1 newsletter for the last five years based on its excellent performance. The Report has rewarded subscribers with a whopping 175% total return over the last five years compared to the Wilshire 5000’s gain of 12% over the same period. Start beating the market with Cabot China & Emerging Markets Report today!