Back to Basics
20 Tips for Better Investing
Biotech Stock Recommendation
The dog days of summer are here, many people are on vacation, and those that aren't are probably busy packing bags and buying BBQ-able meat for a trip somewhere soon. For me, though, this week promises to be the busiest in a while—we're putting on our first-ever Cabot Investors Conference!
If you're coming up for it, I'm looking forward to meeting you. In fact, people will probably be sick of hearing from me; at last count I found myself of five different panels, and I'll be doing two separate breakout sessions, one on chart reading, and one on portfolio management tricks. By Friday noontime, I am anticipating a rarity--I'll probably have nothing new to say about the market!
Anyhow, given the time of year, I figured now was a time to go back to the basics, specifically, 20 basic rules, tools and pieces of advice for you. I view this as blocking-and-tackling sort of stuff--it doesn't show up in the box score necessarily, but lots of investors go awry because they, for one reason or another, get off track and don't adhere to the basics.
So here are 20 of Cabot's top tips and tools that you can use to become a better investor.
1. Cut losses short (definitely rule #1 for growth stock investing).
2. Search for strong sales and earnings growth (especially triple-digit sales growth).
3. Search for revolutionary products with major benefits. First Solar, Crocs and Green Mountain Coffee Roasters filled the bill and were some of our biggest winners.
4. Heed the message of the overall market—never fight the main trend!
5. Never average down in growth stocks.
6. Be prepared for all contingencies (always have an exit plan ahead of time).
7. Never try to buy at the bottom or sell at the top (if you try, you'll just lose more money).
8. To avoid gut-wrenching volatility, stick with stocks that are liquid (at least 500,000 shares traded per day or more).
9. Only put more money to work after your past purchases are showing you a profit.
10. Be humble—making money in stocks is tough, so don't kill yourself over one or two bad trades. Be thankful when you hit a big winner.
11. Find an investing system that works for you, then follow it. The best way to deal with stress from the market is to have a game plan ahead of time. If you wait until things are blowing up in your face, it's too late--by then, your emotions are out of control and you're likely to do the exact opposite of what's constructive.
12."Markets are never wrong; opinions are," is a quote from Jesse L. Livermore, one of the most colorful, flamboyant and respected market speculators of all time. At Cabot, we agree wholeheartedly with his comment and truly embrace this thinking. And you should, too, if you want to become a successful growth investor.
13. When looking for potential purchase candidates, examine both the company's fundamentals and its stock's technical performance. When analyzing the technicals, focus on the stock's momentum and price chart, along with its volume pattern and 50-day moving average.
14. Find a company that has a big idea ... one that leaves few, if any, limits on its future growth potential. It's these big ideas that create an atmosphere that can push a growth stock to dizzying heights!
15. Warren Buffett once said there were only two rules to follow with your investments: Rule #1: Don't lose money. Rule #2: Don't forget rule #1.
16. Our goal is to get you heavily invested while the market is trending higher. During those times, when investor perceptions are improving, investors are willing to pay more and more for stocks. This is when you can make big money! But, of course, no market moves in one direction forever. So, when the intermediate-term trend of stocks is down, your best move is to play defense. Easing up on new purchases, while building up cash by selling your weakest stocks, is a good idea.
17. Be an optimist. In our more than three decades of publishing investment advisories, we've seen many ups and downs for both the market and our country. But after every tough event, our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because our country and stock market will give you some dazzling opportunities!
18. Diversify your portfolio. For our Model Portfolio in Cabot Market Letter, 12 stocks provide plenty of diversification for your growth portfolio. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
19. Once you've invested in a stock, be patient. Recognize that time is your friend. Frequently stocks don't go up as fast as you might want them to. But if you can develop a persistent and tolerant attitude coupled with plenty of patience, you'll have a great advantage.
20. Buy growth stocks with strong Relative Performance (RP) lines. RP studies are a superb way to identify successful companies and to avoid problem companies. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding. The best investing tips come from the performance of the stocks themselves. So ignore hot tips!
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For my stock idea in today’s Wealth Advisory, I’m going to stick my nose into the biotech sector. To me, it’s a unique time in the group—the biotech sector is generally known for high-flying, lottery ticket-type companies whose stocks can soar or plunge 50% based on some drug trial data.
But these days, you don’t have to take undue risk to make some big profits. It turns out some of the bigger firms in the group have new, revolutionary drugs set to hit the market, and/or label expansions of some existing drugs they already sell (i.e., these drugs will be used in a wider variety of treatments, hence boosting sales).
Celgene (CELG) has been a favorite of mine since early this year; we’ve owned it in Cabot Market Letter since about 100 and I think it continues to look great here. Thanks to a few new launches and labels in the quarters ahead, management (who is historically pretty conservative) believes earnings will be near $9 per share in 2015 and north of $13 in 2017, up from $4.90 last year.
But for my recommendation today, I’m going with Gilead Sciences (GILD), which is a great, profitable company thanks to its top-notch HIV franchises. And those treatments should continue to sell well, though the firm’s sales and earnings have stalled out in recent quarters.
Investors instead are excited about the firm’s new Hepatitis C treatment, which has enormous potential. Here’s what we wrote about Gilead in Cabot Top Ten Trader just over a week ago:
“Gilead, which specializes in developing and marketing HIV/AIDS treatments, reported second-quarter earnings on July 25, blowing past Wall Street’s expectations. For the quarter, the company posted a 15% year-over-year rise in revenue due to strong sales gains for its core anti-viral HIV treatments. Digging into the report shows that product sales grew 14%, driven by a 20% surge in U.S. sales and a 4% rise in European sales. Outside of the strong quarterly figures, Gilead was also bolstered by news that the FDA placed a partial clinical hold on Vertex Pharmaceuticals’ hepatitis C drug, VX-135. The setback was seen by investors as a boon for Gilead’s competing medication, Sofosbuvir, which the company gained control over in 2012 after purchasing Pharmasset for $11.1 billion. Sofosbuvir has shown great promise in Phase II trials, curing 95% of all cases when combined in treatment with Ledipasvir. Because of this, the FDA granted Sofosbuvir’s New Drug Application priority review, placing the hepatitis C treatment on a fast track market. Gilead filed its NDA for Sofosbuvir on April 8, and the FDA has set a target review date of December 8, though there is an advisory committee hearing for the drug slated for October 25.”
Thus, the fundamental background looks great; after hovering just south of $2 per share for three years, earnings should soar to about $3 per share next year. And then they’re estimated to double again by 2016! Given the potential of Gilead’s hep C treatment, and the fact that Vertex’s competition product fell flat on its face, I think those estimates could prove conservative.
Moreover, the stock looks to be at a nice entry point right here. GILD pulled back about 20% during the market’s May-June correction, but ripped to new highs in July as the market rallied. Now shares have backed off to support in the 58 area on light volume as the group has taken a rest. Some further retrenchment is possible, but this drop looks normal to me, with no serious selling
I think GILD can be bought in the high 50s or even low 60s, with stop around 53 or 54, which is just below the 50-day moving average.
To get more information on this stock and for the further updates, click here.
Best of luck,
Analyst, Cabot Market Letter and Cabot Top Ten Trader