Are You Thinking Big Enough?
The Big Swing Makes the Big Money for You
Potential Big Winner: ServiceNow (NOW)
We’ve all heard the personal finance advice on how saving can allow you to live comfortably in your golden years. Most of these things revolve around relatively small stuff that adds up over time—putting away those cash-back rewards you get from your credit card, or laying off the Starbucks most days, or simply using coupons when you hit the grocery store. If you do these things, you can save $10 per week, which is about $45 per month, $520 per year ... you get the point.
In the investment world, it’s a similar story. Most advisors insist that workers put aside a chunk of their pre-tax salary with every paycheck; that might be only a couple hundred dollars every two weeks, but over many years, it adds up to a nice nest egg. You’ve seen the charts that project how much savings you’ll accumulate if you put away X dollars and earn 7% per year, etc. etc.
You probably expect me to dump all over this incremental strategy ... but honestly, I don’t have a major issue with it. In fact, I live like the experts tell me to! It’s simple math that cutting back a little today can have profound impacts on your finances over time.
Thus, I do have my cash back from my credit card deposited to my brokerage account. I use my Keurig at home (or, better yet, the one at work—thanks Tim!) for all my coffee. I’ve bought a couple of Cree LED light bulbs (and plan on buying more), which should save me a few bucks every year for the next decade or two. And while I don’t do much of our grocery shopping, I know my wife loads up on stuff when there are sales.
I clearly have nothing against penny pinching. However, my issue is that penny pinching isn’t an investment strategy!
Specifically, I don’t think nearly enough people think big enough when it comes to growing their wealth, especially after the last decade of bad vibes in the economy, stock market and housing market. I’ve been guilty of this as well.
A very good friend of mine has always been interested in real estate; he was one of the first of my pals to buy something (a condo, even before he was married) and did well with it. Then he and his wife found a fixer-upper in one of ritzier towns in Massachusetts. It was a foreclosure (the builder basically ran out of money during the bust, leaving just the studs), and it was on a main road, but it had a ton of land. My buddy saw an opportunity.
Long story short, they bought it, hired contractors, fixed it up over many months and eventually moved in. I don’t know exactly what they bought it for or how much they put into it, but I can guess. And the end result is that the house is probably worth a few hundred thousand dollars more than they put into it! Not to mention they are living in it and enjoying it!
Of course, they did spend countless hours planning and checking on the property when it was being fixed up. But they enjoy that kind of stuff, and besides, nobody’s going to argue it wasn’t all worth it.
Now, my point isn’t that we should all become real estate fixer-uppers, though after the bust of the last few years, maybe that’s not a terrible idea. My point is that, while 90% of the public is focused solely on saving $2 per day by doing things like brewing coffee at home, there are opportunities out there to make truly big money, yet few people take advantage of them!
Bringing this conversation over to the stock market, I’m seeing the penny-pinching mindset firmly entrenched among the vast majority of the investing public. Every time I see a strong stock run up for a few days, then reverse lower one day, I invariably get questions from readers asking what’s wrong. In the same vein, I routinely hear from many people who owned a stock, sold it for a few points of profit, and now want to know if they should get back in.
Going even further, I just saw an article this week that was all about how the clients of one major financial advisor have mostly missed out on the market rally of recent months ... but are still very happy! Why? Because their expectations have been cut down to the nub—one quote from the article said they feel like, “We’re OK, we’re not making a lot of money but we’re not losing any money. We’re up.”
Again, there’s nothing wrong with that outlook, especially if you’re well into retirement and you’re focusing more on your golf game than your investments. But usually when expectations are lowest is when there are opportunities to shoot big.
With that in mind, I’m re-reading Reminiscences of a Stock Operator again this summer. It’s my favorite investment book by far (and I’m not the only one); I used to re-read it every couple of years just to keep my mind sharp, but I haven’t read it in a few years. But that’s made reading it this summer all the more worthwhile.
There are too many relevant quotations and quips to list, but the one that’s sticking in my mind now is simply this: “The big money is made in the big swing.” Jesse Livermore, the main character of the book (under the fake name Larry Livingston), meant that for both the market (the big money is made during big market uptrends) and how you handle your stocks (he tended to buy huge positions).
I’m not going to get into an entire portfolio management strategy here—though I will at Cabot Investors Conference on August 14-16; click here for details!—and I don’t think plunging all of your portfolio into one or two stocks makes any sense. But I do believe that thinking big, possibly by setting some larger goals, is a good idea, even if it applies to only a portion of your portfolio. http://conference.cabot.net
What goals am I talking about? One might be for your total return; you might aim to make 20% over the next six months. (Again, maybe this would only apply to part of your portfolio.) Or, when it comes to individual stocks, you might aim to make 50% in a couple of names—that might prevent you from selling after the stock has one bad day.
Of course, you still need solid sell rules and you should cut all losses short; controlling risk is always important. But the point is to think big. After all, if you don’t try to develop a few big winners, you never will!
In terms of the current market, we enjoyed a great run from the June 24 market low through last week, though I have seen a little abnormal action this week—some of the glamour stocks like Tesla Motors (TSLA), YY Inc. (YY) and ExOne (XONE) all have suffered huge-volume declines. That said, none has truly broken down, so I’m not reading that much into it ... but it’s probably is a sign that the next few weeks (with earnings season cranking along) will present some challenges.
I’m still thinking big, believing that the market’s straight-up move from the June low is a sign that the market can head meaningfully higher in the months ahead. And so I think there could be some bigger winners going ahead.
Now, I could just list a couple of super-strong stocks and say they’ll probably stay strong for a while ... and that’s not a bad strategy. But in this Wealth Advisory I’m going to talk about a stock I haven’t mentioned for a few months, but which has most of the characteristics of potential big winners. And the stock has set up a huge launching pad, too.
The company is ServiceNow (NOW), and here’s what I wrote about it way back in April in Cabot Top Ten Trader:
“ServiceNow’s story can be a bit of an ice cream headache; the company says its software helps automate IT services (whatever that means) and serves as an ERP for IT. But how we think of it is far simpler—the firm’s software, which is delivered through the Cloud, serves as a company’s command center for all things information technology, allowing information officers to see what’s working, what’s not, prioritize and develop fixes and, of course, track progress and effectiveness over time. It sounds kind of simple, but it’s not; ServiceNow sells almost solely to large organizations, which have an incredible number of “events” to fix or check out (management said Citigroup, one of its clients, has thousands every week, most automatically produced by servers, networking equipment and the like). Think of it as a customizable Salesforce.com but for the IT department. It’s been a huge hit— sales growth has been rapid in recent years, and the firm’s renewal rate is a jaw-dropping 98%. In fact, at year-end, the company had a backlog of $549 million, more than twice its sales of last year. Profits are slowly coming on, but cash flow is already positive and growing quickly, and I see years of fast growth ahead. True, it’s a bit of a 1990s technology story, which isn’t in favor in this market environment, but I think ServiceNow has the makings of a big winner.”
At that point, the stock appeared to have broken out of a big base and was ready to move ... but it was not to be, and NOW has etched a new, tighter base, about 20% deep, since that point. All told, the stock has basically been base-building since mid-September of last year; shares did nose out to a new high last week but pulled back with most leaders this week.
Few investors have heard of the company, which makes me think that, as ServiceNow grows at rapid rates for many quarters to come, more and more mutual, pension and hedge funds will accumulate shares. Moreover, because the company has such a high renewal rate and huge potential market (management estimates it’s only penetrated less than 10% of its target market), there’s plenty of room for growth ahead.
Now, the stock is liquid enough (it trades $73 million of volume per day), but I wouldn’t say it’s one of the liquid leaders; it’s going to be choppier and more volatile than the bigger growth stocks out there.
Given all that, I think you could play this two ways. First, if you want in now, you could buy maybe one-third to one-half of what you’d normally buy (dollar-wise) here, with a mental stop around 39. Yes, maybe the stock gaps down below that stop on earnings, but that’s why you only have a small position.
However, should the stock react well on earnings (or not do much of anything), you could add the rest of your position once you’re up 10% or so from your initial buy. The bottom line is that, after such a good-looking basing effort, and with such great growth, another positive reaction on earnings would make it likely the major trend has turned up.
If you want to be safer, you can just wait for the earnings report and buy if the stock gaps up, but taking a little risk (again, just a small position) ahead of the report could help you get a head start on a future big winner. For an update and more insight on ServiceNow (NOW) and other stock recommendations, consider a risk-free subscription to Cabot Top Ten Trader.
All the best,
Editor of Cabot Market Letter
and Cabot Top Ten Trader