Stocks Breaking Out to New Highs Are Your Best Bet
Six Stocks Breaking Out
Editor's Note: Matt here. Before you read Tim's column today, I want to let you know that there's a special announcement at the end ... so make sure you read all the way to the end. And now here's Tim:
It was just two weeks ago.
I was driving in the Austrian Alps with my wife, heading from Munich, Germany, to Bled, Slovenia, a drive that Google promised would take about five hours.
We had recently finished a nice lunch in the venerable spa/ski resort of Bad Gastein (whose thermal springs boast an elevated radon content!), and were headed for the tunnel that would take us under the highest Alps and out to the southern slopes that led to Slovenia.
All around were mountains. There was snow on the roadside and ski resorts were still operating.
Suddenly, the little road dwindled to a gravel track, a railroad terminal appeared, we approached a curious barrier with a tollbooth and my Tom-Tom GPS unit instructed quite clearly, "Take the ferry," displaying a picture of a boat on its screen.
There was no water in sight.
What was there, I quickly realized, was a train that "ferries" cars through the tunnel, much like the one I had encountered the year before in Switzerland. They call it an "autoschleuse" or motorail.
If you look closely at the photo I took at the time, you can see the tollbooth, the train track and the GPS screen that says "Autoverladung Mallnitz-Bockstein," as well as the picture of the ferry.
The tunnel, you see, is for trains only. But the trains are built to carry passenger cars, and designed so well that drivers like me can drive their own cars onto the train, set the parking brake, leave it in first gear and be assured of getting through the tunnel safely.
The main difference between the Swiss and Austrian systems is that, in Switzerland, we sat in the car for the entire trip. In Austria, we were obliged to leave our cars and walk to the passenger car of the train.
So that's where we passed the journey through the tunnel, arriving in Mallnitz 11 minutes later and 17 euros lighter.
Which has nothing to do with investing.
But it does have something to do with the idea of going off the beaten path.
The beaten path, obviously, is smooth. When you vacation at Disney World or dine at McDonald's, you know exactly what you're going to get.
When you're driving a rented car in the Austrian Alps, on the other hand, surprises are to be expected.
When you're ordering Slovenian wines, surprises are expected, too. Hint: Stick with the whites.
It's the same in investing. Shareholders of Disney (DIS) or McDonalds (MCD) have a smoother road than investors in Netqin (NQ), Sourcefire (FIRE) or Buffalo Wild Wings (BWLD), all of which have been recommended in Cabot publications recently.
Note: I'm not recommending those stocks now; I'll give you some more timely recommendations later on in this column, but first, a little more about traveling off the beaten path, starting with the obvious question.
Well, it had been on my wish list since 2001, when Frank Bruni wrote a glowing review about his trip (on the coat-tails of a George Bush visit) for The New York Times.
And I had a publishing conference in Munich in late March.
So I convinced my wife that Slovenia was on the way from Munich to Venice, a city she'd been yearning to return to since we first visited 10 years ago.
Our first Slovenian stop, as mentioned, was Bled, a perfect picture-postcard destination, highlighted by a small lake that has small island in the center with a beautiful church on it.
In mid-summer, the town is relatively thick with tourists. In early April, however, traffic was still extremely light. In our hotel, which had 87 rooms, I counted 12 parties on the breakfast list.
Most tourists who visit the island do so in groups, in wooden boats, each one propelled by a young man standing up in the stern and pushing on two oars.
But I rented a "normal" wooden rowboat for an hour (10 euros) and rowed my wife out, which meant we had private time to enjoy the island after a boatload of Japanese tourists left. The church has a bell that tourists are allowed to ring; the legend is that it brings good luck. So I rang it, and once I got the rhythm going, I kept on ringing it, for 20 peals or so, finally yielding the rope to the one straggler from the Japanese party. It was then that I noticed the sign saying you're only supposed to ring the bell three times!
Maybe I'll get more luck!
Here's a picture of me rowing to the island.
Now, as I was planning this trip, I assumed Slovenia would be a cheaper version of Italy, but the fact is, it's more like a southern version of the Czech Republic or Poland. The country shook off the bonds of Communism just over 20 years ago, and the architecture and language are clearly more Slavic in style than Italian.
Nevertheless, it was quite enjoyable. And it was less expensive than Italy.
In fact, we spent Sunday in the capital city Ljubljana, first at the weekly flea market, then up at the castle, which was been splendidly restored and is used for functions, and later at a couple of downtown museums--the National Gallery of Slovenia and the Modern Gallery of Slovenia.
Interesting thing about the museums, though. As it was April 1, the first Sunday of the month, admission was free. Still, they were nearly empty. In the National Gallery of Slovenia, in fact, there were more guards than visitors. ... heaven for visitors like us who are accustomed to dealing with crowds in museums.
One final anecdote about Slovenia. High up on one side of Lake Bled is an old castle. We visited, but found the displays ticky-tacky. Then, as we were leaving, we met the head honcho of the castle's wine shop, whose schtick is to get tourists to bottle their own wine, and then pay for the privilege.
Upon learning we were from America, he commented, "I get many visitors from America here. Last year I had a visitor from Texas. Maybe you know her."
At which I'm thinking, "Does this guy have any idea how many people are in Texas?"
... "her name was Laura Bush."
Moving on, we spent a couple days in the mountains of western Slovenia, and then a couple more in the hills of eastern Italy, in the Collio region. At one point, while driving blindly through the winding dirt roads of Italy looking for wineries, we found we'd inadvertently crossed back over into Slovenia. And because there was construction on one road, we had a devil of a time finding a road that would get us back into Italy.
And then it was on to Venice.
Venice, of course, is not off the beaten track. In fact, with roughly 20 million visitors a year, it's one of the world's most popular tourist destinations, and rightly so. With every passing year, the stuck-in-time city becomes more and more of an anachronism.
Ten years ago, when my wife and I visited with our three children, we saw all the major attractions, St. Mark's Square, the Doge's Palace, the Bridge of Sighs, St. Mark's Basilica, The Correr Museum, the Rialto Bridge, the Peggy Guggenheim Museum and the Gallery of the Academy.
But on this trip, we avoided all but one of those attractions.
So while the majority of visitors were focused on the yellow line on their maps that depicts what I called "the highway," we visited the cemetery on the square island of San Michele, the two big churches on the island of Giudecca, and the lesser-traveled regions on the outskirts of Dorsoduro, Santa Croce, Cannaregio and Castello.
In the hospital zone, we discovered a fleet of yellow ambulance boats, as well as the local UPS boat. It was blue, like all workboats in Venice, not brown.
We watched men deliver a sofa and mattress from a boat.
We watched, from the vantage point of the clock tower of the church of San Giorgio Maggiore, an enormous cruise ship (the MSC Magnifica) being towed past St. Mark's Square ... the ship so big my iPhone couldn't capture it all.
We visited more churches in three days (mainly to enjoy the art and the architecture) than is possible anywhere else on earth. And we went to Mass in the magnificent Basilica dei Frari at 10 o'clock on the night before Easter.
It was a wonderful vacation. ... though occasionally I found myself thinking, "We're in Italy, home of the people who caused so much trouble, the people who borrowed more than they could afford to, the people who cheat on their taxes, the people who like to retire at 50 and then spend decades living off the government. If they had the discipline of the Germans, and the punctuality of the Swiss, Europe wouldn't have got into the mess it's still trying to crawl out of."
Of course, perhaps then Italy wouldn't be such a great vacation destination, either.
Now for today's recommendations.
One great way to find high-potential stocks is to look for breakouts to new highs right after a market correction.
So last week I did just that, two days after the Dow scared the pants off many investors by dropping 200 points in a day ... in the process causing shares to shift from "weak" hands to "strong" hands.
And I found six stocks worth writing about, stocks that are clearly under accumulation by growth-oriented investors.
The most popular of the six among institutional investors--a rough proxy for risk--is Intuitive Surgical (ISRG), the manufacturer of robotic surgery systems that's become a very dependable source of growth, thanks to both increasing global market penetration and recurring income from disposables used in operations. In the latest quarter, revenues grew 28% to $499 million, while earnings grew 24% to $3.75 per share. After-tax profit margins are a fat 30.4%. Since the breakout, however, ISRG has been the weakest of the six stocks, falling back below its breakout level to its 25-day moving average.
Only slightly less popular is Chipotle Mexican Grill (CMG), which has grown revenues and earnings every year of the past decade by opening more restaurants. In the latest quarter, revenues grew 24% to $597 million, while earnings grew 23%. After-tax profit margins were 9.6%, which is great for a restaurant chain. After the breakout, CMG climbed even higher, and it pulled back normally today.
Next comes Tractor Supply Company (TSCO), the Home Depot for rural Americans. Like Chipotle, it grows by simply opening more stores. And, again like Chipotle, it has modest after-tax profit margins, in this case 5.7%. Tractor Supply is the slowest-growing of the six stocks (by revenues); its $1.24 billion in revenues in the latest quarter reflected growth of "just" 20%. But earnings were up an impressive 43% to $0.96 per share! And since the powerful high-volume breakout, TSCO has been holding very tightly in the 98 area, giving little ground.
Moving up the risk scale substantially, we find Liquidity Services (LQDT), a company that runs online auction sites for used and returned merchandise. Not only does it get inventory from seven of the top 10 retailers, more than 30% of its revenues last year came from selling stuff for the U.S. Department of Defense! In the latest quarter, revenues surged 41% to $106 million and earnings rocketed 85% to $0.35 per share. After-tax profit margins were a robust 11.2%. Since the breakout, the stock has climbed higher and higher to hit a new peak today.
Next is a company that came public last October, Ubiquiti Networks (UBNT). The company, located in California, makes high-throughput radio-frequency telecom equipment, which is in great demand in emerging markets because it's cheaper to install than fiber-optic equipment and cable. In the latest quarter, revenues mushroomed 95% to $87.8 million, while earnings zoomed 145% to $0.27 per share. After-tax profit margins were a fat 28.4%. Since the breakout, UBNT has climbed even higher.
Finally, there's a little company that's familiar to most Americans who feed (or have fed) children. It's Annie's, the maker of macaroni and cheese and much more. The stock's symbol, appropriately, is BNNY. In the latest quarter, revenues grew 25% to $30.8 million, while earnings grew 8% to $0.13 per share. After-tax profit margins were 7.2%. Admittedly, the company's growth is not that rapid, but I rate it riskiest because the stock is so young; it just came public March 28. Since the breakout, the stock has climbed higher, and it pulled back today.
Now, if you look into these stocks, you'll notice that the first two are very high-priced, trading above $500 and $400 a share, respectively. But that's no reason to avoid them! That's simply a sign that the stocks--and management--have been successful in the past. So it you invest in these stocks, just buy fewer shares.
Finally, there's the question of valuation. Some investors, presented with a list of stocks like this, will compare valuations, looking to buy the stock with the lowest PE ratio or lowest price to book value. I used to do that long ago too.
But then I learned that if you're investing in growth stocks, and your goal is big profits, valuations are worthless. The poster-boy for that lesson was Amazon.com, whose founder Jeff Bezos famously pronounced that his first goal was to make Amazon.com big fast, and to worry about profits later. Skeptics predicted he would never make money, but Bezos sure proved them wrong, and AMZN went on to become one of Cabot's biggest winners, notching profits of more than 2,000%.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor's note: I promised you a special announcement today, and here it is:
On April 13, you heard about 50 brand-new seats opening in Cabot Small-Cap Confidential, the most exclusive newsletter that Cabot offers.
This is the first time in five years that 50 seats have opened up at the same time to this $1,400 per year advisory with such a low price--$2 a day for the first 90 days.
And since that initial email, 45 of your fellow readers have signed up. These new subscribers decided that yes, they want the chance to bank gains like the 16,209% profit in Medifast, 9,211% in Green Mountain Coffee Roasters and 5,975% in Bally Technologies.
I expect the last five seats are going to disappear just as fast, so if you've always wanted to try investing in small-cap stocks but weren't sure, I highly suggest you sign up for Cabot Small-Cap Confidential at the low introductory price of $2 a day for 90 days.
Because, and I have to be honest here, I don't know when--if ever--50 seats are going to open up at the same time again. And you don't really want to wait another five years because you didn't act now do you?
Watch out for the email on April 18 where you can sign up for Cabot Small-Cap Confidential before all the seats are gone!