Don't Judge an Investor by Their System
A Semi-conductive Stock Pick
My theme today is conflict, and at the end of my first rant I have a question to ask you. And I'd actually like to hear your response. I'll even publish your answers next week.
I know it's risky to address hot-button political issues in a Cabot Wealth Advisory, but I feel compelled to write a quick word about China "stealing" American jobs. This is one of my favorite themes, and I've written about it before.
The run-up to this year's presidential elections has featured innumerable debates, and the U.S. economy's failure to provide adequate jobs for Americans is a consistent flash point.
Everyone enjoys bemoaning this failure, and everyone seems to know exactly who to blame. Some candidates even have proposals for what to do about it.
But they don't seem to make much sense.
Maybe it doesn't make sense to expect consistency from political debates. American political discourse has become so polarized that any debate about political principles, political practices and political realities almost automatically turns into a name-calling, crap-flinging shouting match.
That's exactly how many people like their politics. But not me.
Mostly I survive campaign seasons by resolutely ignoring what's going on. I listen to books on CDs during my commute and get my news online and from newspapers, where I don't have to hear the spin, hype and fake outrage of the participants.
Yes, I keep up on the issues. But I'm not much interested in listening to the newsmakers or commentators themselves. After all, it's not like there are any difficult voting decisions to be made. My voting choices have been scrubbed clean of any subtlety, creativity or compromise. In a polarized process, it's not hard to tell which pole you gravitate toward.
As someone who used to teach argumentation and debate in colleges, the only real pleasure I usually get from the political climate we have now is sneering at the logical contradictions that seem to be baked into many political themes.
So, returning to the idea that American jobs have been somehow hijacked (Shanghaied?) by China, what do we find? This charge has become so common in American political discourse that it doesn't even raise any eyebrows.
But just because we're used to it doesn't mean it's correct.
If you take it seriously, talking about China's "stealing" jobs sounds like a nefarious and underhanded enterprise. The picture I get is of Chinese factory managers sneaking into the U.S. and bribing CEOs to compromise their principles and ship jobs to China. Maybe hypnosis is involved ... or drugs?
My sense of how things actually work is that the CEOs of international companies, including those headquartered in the U.S., are always looking for ways to make a buck (which stock investors call "creating shareholder value"). So they seek out the most cost-effective ways to get products to market. And if that involves sourcing stuff from Chinese factories, that's what they do. If you ask them about it, they will tell you that not doing so would be a breach of their contract with the people who own stock in their companies.
Yes, the result is that an American worker loses a job. But the CEO's responsibility to his company's investors doesn't usually have a patriotism clause.
So what's a CEO to do?
Here's my question: If you were given control of regulating U.S. companies, what would you do to keep U.S. jobs in the U.S.? Tax incentives for creating new jobs? Prohibitions or penalties for sending jobs overseas? Rewards for employers who onshored jobs that had been offshored?
I'm really curious to know what you think, and I'll publish the most interesting responses on Monday, April 9. Just send your thoughts to firstname.lastname@example.org.
The debate about the best way to manage your investments has existed as long as there have been investors. And the controversy isn't a polite tea-party affair, either. Indexers ridicule active investors. Growth devotees deprecate value folks. Options traders look down their noses at long-only types. Bond buyers roll their eyes at stock investors. And, frequently, investors who are riding a wave of success in any style shake their heads with dismay at those who are not.
Myself, I'm a growth guy. I prefer to handle things myself, and I'm looking for stocks that have the potential to deliver big returns fairly quickly.
I know that I have to work hard to make money in this style. It means paying attention to how both the broad market and my individual stocks are doing, and making difficult decisions on buys and sells. I have to absorb occasional losses when earnings reports turn a stock sour. And I have to sweat out what to do with my stocks when they have big gains, too.
All of this attention and micromanagement would clearly be too much for someone who didn't enjoy it. And it can try even my patience at times. But it's also the style that fits my personality, my enjoyment of games and my desire to test myself intellectually and improve my skills.
But here's the big story: it's not the only style of investing that can make money.
In fact, at Cabot we believe that you can make money in any investing style if you follow the rules for that style!
For value investors, that means diversifying your holdings to spread risk, buying stocks trading at attractive discounts to future earnings and holding stocks for however long it takes for them to appreciate to their true value.
For growth investors, it means buying stocks with a good story, solid fundamentals and a chart that reveals strong (and growing) interest from big investors. It also means being prepared to cut loose unsuccessful picks without a backward glance.
The Cabot family of newsletters addresses a wide variety of styles, and the most important decision you can make is to find the one that fits your own temperament. Because if your investing personality isn't right for the strategy you pick, you won't be able to follow the rules, the same way someone with a taste for poker may fail completely at chess (and vice versa).
So maybe everyone should cut people whose investment style differs from their own some slack. They have to be who they are, and so do you.
My stock pick this week straddles the growth and value worlds. It's Spreadtrum Communications (SPRD), a Chinese designer of semiconductors that specializes in the chips that power 3G phones. The company has carved out a nice niche because its devices serve the unique 3G standard that's used on many Chinese networks, including the biggest one, which is run by China Mobile.
Spreadtrum's baseband chips enable email, the Internet and all the video, photos, texts, music, movies and other battery-intensive applications that make modern mobile handsets such power hogs. And they do it in a way that delivers high performance and excellent power management.
Spreadtrum's fundamentals are very sound, with a 230% jump in revenue in 2010 and 95% in 2011. After-tax profit margins have topped 20% for the last seven quarters, which is a tribute to the company's "fabless" strategy of designing, developing and marketing semiconductors, but not manufacturing them.
SPRD is liquid (average trading volume is over a million shares per day) and pays a dividend with a forward annual yield of 2.3% (10 cents per share, per quarter). Institutional sponsorship has reached 164, its highest level ever.
SPRD was a penny stock back in 2008, but it roared to 24 in early 2011, then plunged to as low as 9 in June 2011 when a short-seller raised questions about the company's inventory reporting and other practices. Fortunately, that cloud passed quickly, and SPRD, unlike many victims of short-seller accusations, made a new high at 30 in November. Since then, the stock has bumped downhill, slipping below 14 in early March, before bouncing a bit in recent weeks.
The most impressive statistic about SPRD for many is its attractive P/E ratio of just 6. That makes it the kind of bargain that value investors like to discover.
SPRD won't really be back on my radar until it can clear resistance at 17 and show a convincing breakout on good volume. That's the momentum component of the Cabot growth investing strategy.
But Spreadtrum looks like a sound, profitable company trading at a great price. It belongs on your watch list no matter what your style.
Don't forget to send me your suggestions for how you would approach the problem of keeping jobs in the U.S. I'll let you know next week what your fellow readers have to say.
Editor of Cabot China & Emerging Markets Report