Growth Versus Value
A Stock for Your Inner Value Investor
It's an interesting time to be a political animal living in New Hampshire. It gets especially interesting every four years when the presidential primary juggernaut roars into view.
This year the juggernaut is roaring even earlier than usual. With state after state trying to grab a little bit of political leverage for its issues (and a little piece of the campaign spending pie, too), this year's primary will be earlier than ever. New Hampshire law requires that its primary be held before any other state's, so every state that's tried to move closer to the front of the line has just pushed New Hampshire's primary earlier and earlier. (Iowa squeezes ahead of N.H. on the technicality that its delegate-selection event is a caucus, not a primary.) The talk is now that we hard-bitten Yankees may be voting as early as December 6.
It's certainly natural for lots of states to seek some influence and policy input by pushing their primary dates up. It's also natural that lots of Americans resent the attention (and the economic benefits) that New Hampshire gains from its first-in-the-nation primary. And finally, lots of people wonder whether it's a good idea for a small state that's nowhere near the national average in its ethnic, racial, religious or economic composition to be taking the first crack at picking our national parties' candidates.
As a long-time New Hampshire resident and a keen observer of the political process, I think my state is actually a great place for a first primary and does the nation a huge service by doing so. Here's why.
Running for president in New Hampshire is done on a retail level.
New Hampshire has one statewide newspaper (The Manchester Union Leader) and one regional TV station, both of which are considered to be part of the state's conservative establishment. You can't really use them to reach the independents and Democrats of the state, nor even many of its Republicans.
All serious candidates buy time on the big Boston stations to reach voters in the populous southern tier of the state, but that doesn't cut the mustard in The Granite State. New Hampshirites demand (and get) time to talk to presidential aspirants, look them in the eye and ask them questions about what's on their mind. There aren't that many people in New Hampshire, and candidates know that every vote is worth fighting for. So they do.
If you're willing to spend enough time in Harvey's Bakery and Coffee Shop in downtown Dover, which is my hometown, you can pretty much collect the entire set of candidates of either party (and a few fringe parties, as well) during the primary season.
New Hampshire is small.
This is really the big fact behind the first reason. Someone who wants to run for president can come to New Hampshire a few years ahead of time and get to know the party leaders of the entire state. I've talked with candidates who've driven around the state for weeks at a time (it's less then 200 miles, north to south, and less than 70 miles east to west) and talked to whoever would listen (the entire state has fewer people than the cities of San Diego, Caifornia or San Antonio, Texas). And if people liked them, they'd read their fliers and introduce them to their friends.
We New Hampshire voters take our jobs very seriously.
New Hampshire voters get to know their candidates by listening to them in Elks, Moose and VFW Halls and high school gymnasiums. We meet them in coffee shops and diners and on the streets outside factories and malls. We take our responsibility to the nation seriously, and don't very often get fooled by promises and cliches. If we are going to demand that politicos stand out in the snow and meet people, we have to be willing to go out into that same snow to do the meeting. And we do.
New Hampshire voters are famous for delivering surprises. We look behind the polls and challenge the common wisdom. And when we like what we see, we deliver a message to the rest of the country that the surprised candidate is (or isn't) the genuine object.
So, that's the case for New Hampshire as I see it. Maybe we don't have a big population of minorities or immigrants, but we take individual rights and civic duties seriously and have the Civil War monuments and graveyards to prove it. Perhaps we're a little more conservative than some states outside of New England (although that's changing rapidly as newcomers flock to the south of New Hampshire to take advantage of our lack of both a sales tax and an income tax), but it's a kind of conservatism that roots for underdogs and mistrusts authority--the state motto is Live Free or Die, and there's a little bite left in it.
Eventually, the economics and ideology of bigger states may strip New Hampshire of its special place in the nominating process. But the downside will be a transition to wholesale, media-based campaigns that will allow candidates to court huge populations of voters with radio, TV and direct mail campaigns. There won't be a small group of dedicated political junkies looking candidates in the eye and testing their handshakes and asking the toughest questions they can think of. And something will be lost.
You may be asking what does all this political talk have to do with investing? Not much, really. But when I first moved to New Hampshire back in the late 1970s, when the cows still outnumbered the people (true!), I was deeply skeptical about the influence that my granite-headed neighbors had over the selection of our national leaders. Since then, I've come around, and I just wanted to get my opinion out there.
When equity markets are in a totally bullish mood, Cabot's growth stock analysts often get emails about successful buy recommendations. Our subscribers are excited and grateful when the stocks they bought on our say-so are making money, and they let us know.
Unfortunately, markets have been acting like a cat that's coughing up a hairball, making nasty noises and delivering up very little of any value. Accordingly, we haven't been getting many emails congratulating us on our great stock picks.
Our favorite messages these days are the ones that say, "Dear Heroic Cabot Stock Analyst, I'm almost all in cash, and I owe it all to you for telling me to stay out of the market! Thanks!"
Or, at least that's the kind of message we'd like to be getting.
But the fact of the matter is that growth investors just aren't built to be grateful for cautious advice and conservative strategies.
Growth investors are willing to take on risk in pursuit of higher returns. It's their defining characteristic.
In a manner of speaking, growth investors are willing to flip a coin because there's a 50/50 chance that they'll win.
Value investors, on the other hand, refuse to flip the coin because there's a 50/50 chance that they'll lose.
Value investors work hard to avoid the kind of big dips that just hit Apple (AAPL) following its rare earnings miss on October 18 or the one that just knocked Crocs (CROX) facedown in the dirt. Warren Buffett, the high priest and guru of long-term value investing put it very succinctly in his rules for investing: "Rule #1: Never lose money. Rule #2: Never forget Rule #1."
I find the differences between growth and value investors genuinely fascinating. I'm also intrigued by the tendency of both groups to regard members of the opposing camp as deluded idiots.
But the real reason for this commentary is to encourage you to examine your own behavior and to use your insight to make yourself a better investor.
If you examine the results that your portfolio has delivered in the past year or so, you might be surprised what you find. There may be stocks that have traded sideways for a long time, not delivering a dime's worth of appreciation. And if you are holding stocks like that because you think of yourself as a value investor, you need to examine your thinking.
Similarly, if you have stocks that have slumped to big losses but you have avoided selling them because you're aggressive and don't mind sitting with the loss, you're probably fooling yourself. Stocks with big losses often lose even more, which means you're throwing good money (whatever the stock is still worth) after bad (what you've already lost). A review of your sell disciplines will get you back on the right track.
I'm a firm believer in the old Walt Kelly (anyone else remember Pogo, the best comic strip ever?) saying that, "We have met the enemy and he is us." The time you spend figuring yourself out can be every bit as valuable as trying to figure out the market.
Despite my personal preference for growth stocks, there are times when an investor has to give a nod to reality.
In a market like this, great setups for growth stocks are thin on the ground, and some of the old leaders are springing leaks left and right.
So it's a good time to get in touch with your inner value investor, and that's what I'm doing with Tata Motors (TTM).
Tata Motors is an Indian car and truck builder that manufactures an astonishing variety of vehicles, from the Tata Nano, the world's cheapest, fully enclosed four-passenger car, to Jaguars and Range Rovers. The company sold just over one million vehicles during its 2010-2011 fiscal year that ended in March. That's up from 870,000 the previous year.
Q2 results extended the company's string of quarters with double-digit revenue growth to seven, although earnings dipped a tad (down 3%) during the quarter. So this is a growing, solidly profitable company.
There are two killer numbers for TTM. The first is its P/E ratio of 6, which is absurdly low for a profitable manufacturer in a high-potential home market that also has significant overseas opportunities in its Jaguar and Range Rover lines.
The second number is 318, which is the number of institutional investors who are onboard with the stock. That number was 214 a year ago, and has increased steadily every quarter since the beginning of 2009.
Tata's management has shown both its ambition in taking on two international prestige automotive lines and its competence in managing the integration of those brands.
After a drop from 38 in late 2010 to a sloppy triple bottom just below 15 last month, TTM isn't a growth investor's poster child. But for those with patience (and who appreciate the stock's 2.2% forward annual dividend yield), TTM offers a solid opportunity.
You could buy TTM here and hope for the best or you could check out Cabot China & Emerging Markets Report, the top source for the best stocks in the world's fastest-growing economies. The Report has been named one of the top-performing newsletters since its inception in 2004 and there's a lot more where that great growth came from! Get started today.
Editor of Cabot China & Emerging Markets Report