ACT Not React
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Every fall, we celebrate the anniversary of Cabot Small-Cap Confidential and this year is no different. In honor of this occasion, I've conducted a Question and Answer session with the editor, Thomas Garrity. I'm bringing it to you in two parts; last week you read part one and today I'm bringing you part two. I hope you enjoy it!
Where do you see the market, and small-cap stocks, going for the rest of 2011? What about 2012?
Despite a rebound in the stock market in 2010, it's evident that uncertainty about the economy and the durability of the recovery have come into question. The stock market's review of the nuclear crisis in Japan, the health of the global banking system and credit markets, the pace of China's growth, the contraction of the U.S. gross domestic product, the still-sinking U.S. housing sector and high unemployment, have all contributed to the unusual volatility in the equity markets.
Depending on the headline news, investors are vacillating between being hopeful of economic expansion (and therefore pushing stock prices up) and fearing that the economy will enter a double-dip recession (and therefore pushing stock prices down). As a consequence of this conflicting data, investors have let their fears about economic issues cloud their investment judgment, often leading to under-appreciation of great growth stories. This can often lead to even more investor fear in what seems like a never-ending cycle.
As evidence, the Russell 2000 Index is down 21% in the last three months and off 17% year-to-date, which provides some attractive valuations in small-cap stocks. Lower valuations for small-cap stocks means there's more room for expansion or even for acquisition by a larger company seeking to boost it's own growth.
There are a lot of positive undercurrents in the stock market today that are setting the stage for the next major move. We think the Russell 2000 Index will likely end 2011 with a negative return. But in 2012, when both businesses and consumers have a better picture of available purchasing power and disposable income, there could be a major pick-up in the Russell 2000 and it's likely to finish 2012 with a double-digit positive return.
What are some of your favorite sectors right now?
As I mentioned before, I'm not placing bets on the direction of the economy. Rather, I have a short list of sectors where I believe innovation will continue and not be hindered by the economy's starts and stops. My top areas to invest in now are healthcare, information/wireless technology and robotics.
Many factors are lining up to create a boom in the healthcare sector in the next several years. Demographics are lining up favorably, as a growing aging population will boost many stocks in this sector. There is also an increasing need for healthcare cost containment and a need to better identify and treat many diseases. The U.S. can expect to spend 25% of gross domestic product on healthcare in the next decade. The mapping of the human genome means that targeted medicine and genetic testing will be in great demand. The obesity epidemic has given rise to new technologies to treat this problem, which will likely benefit many stocks in this sector. Electronic medical records are sure to be a big business as more information becomes digitized.
Information and wireless technology is another promising field for investment. The convergence of media, communication and computing occurring on smart phones and always-connected mobile devices like tablets or laptops means that data traffic will continue to explode. Invest in companies involved in manufacturing the displays for these devices and those involved in secure data transfer, among other things, to capitalize on this trend. There are many everyday tasks that have new technologies, like paying for goods with a swipe of your mobile phone. And this means that we'll all need more bandwith, another good area for investment.
Finally, robotics will be used more in several industries to perform dexterous tasks and common assembly. In medicine, robots will guide surgical procedures, saving time and delivering better patient outcomes.
Is there anything else that you want to add?
I think that investors are entering one of the most challenging eras in the history of investing. Countries all over the world must de-leverage their balance sheets and find new sources of income to deliver real prosperity to their populations. Considering that every business starts out small and has origins in uncharted territory, I couldn't think of a better time to invest in small-cap stocks.
I hope you enjoyed part two of my Q&A with Tom. If you'd like to learn more about Cabot Small-Cap Confidential--and take advantage of our Limited Time Anniversary Price Rollback--click here now!
Now for this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
ACT Not React
The capitalization of the first word on this button is quite unusual, as is the ungrammatical nature of the phrase; "Act, don't react" would be proper. Nevertheless, the sentiment is clear. If we only react, we will always be followers. Contrarily, if we think intelligently for ourselves, we can anticipate and thus sometimes find ourselves at the front of the parade.
In this week's Stock Market Video, Cabot China & Emerging Markets Report Editor Paul Goodwin said it was a bad week in the market, with the indexes looking very unhealthy. When the market is in a downward trend, it puts a lot of pressure on stocks, which was evident this week. We recommend holding mostly cash right now to preserve capital for the next uptrend. Stocks discussed: U.S. Steel (X), Ford (F), General Electric (GE), Amazon.com (AMZN) and Apple (AAPL). Click below to watch the video!
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One of the Most Brilliant Records Ever Tracked
Click here to find out why MarketWatch's Peter Brimelow wrote "Cabot China & Emerging Markets Report has had one of the most brilliant records ever tracked by Hulbert Financial Digest." It's currently ranked #9 for five-year performance with a solid annualized return of 9.7% vs. the Wilshire 5000's paltry annualized return of 1.3%.
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 9/26/11 - Weighing the Evidence
On Monday, Cabot Options Trader Editor Rick Pendergraft related his recent experience reporting for jury duty to the stock market. He explains how he uses three types of analysis--technical, fundamental and sentiment--to determine the direction of the market.
Cabot Wealth Advisory 9/27/11 - The Safest International Dividend Player on Earth
On Tuesday, you heard from Paul Tracy, a co-founder of StreetAuthority and chief investment strategist of StreetAuthority's Top 10 Stocks. Paul discussed an investment he calls one of the safest dividend-paying stocks on the planet. Featured stock: Philip Morris International (PM).
Cabot Wealth Advisory 9/29/11 - A Word About Whipsaws
On Tuesday, Cabot Market Letter Editor Mike Cintolo discussed how whipsaws are f act of life sometimes when you use trend-following indicators, like we do in Cabot Market Letter. Mike also discussed how to determine which stocks will be the best to ones to buy when the market turns positive again. And he featured a stock that could be a new technology leader. Featured stocks: Universal Display (PANL).
Until next time,
Editor of Cabot Wealth Advisory
P.S. If you missed part one of my Q&A with Cabot Small-Cap Confidential Editor Thomas Garrity, you can read it be clicking here.