Focus on What Counts
Qihoo 360 (QIHU)
They Laughed When I Bought Tesla …
Last year, when I told my Cabot Top Ten Trader readers to back up the truck and buy Tesla with both hands, I got a lot of flack from my colleagues in the trading world.
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As a rabid NFL fan, I am thoroughly enjoying weekends nowadays. I commonly refer to the period of time from the start of August (roughly the start of training camp and preseason games) through the end of January (usually just before the Super Bowl) as the best six months—not only do I love watching the sport and following all the story lines, but it’s a great time of year here in New England, going through blazing hot beach weather, to apple picking season, right through foliage season, the holidays and a few glistening snowstorms.
The offseason is a bit more depressing—the weather here stinks (our winters are five to six months long, basically, so February and March tend to just be cold and drizzly) and the only football “news” you see is generally rumors and some free agent signings. However, with late-April comes the NFL Draft, which is sort of like the Christmas of the offseason, as every team gets better and many fans put on their amateur scouting hats.
These days you can get all sorts of scouting reports and mock drafts for free online; for the hell of it, I started buying my Dad Mel Kiper’s scouting book last year. It’s fun to flip through and read about all these prospects—the scouting reports make every player sound like Superman! And it makes the draft itself entertaining, sort of a mini-spectator sport.
(Funny story: The first year I got that Kiper draft guide for my Dad, which has rankings and write-ups on maybe 300 players, the Pats selected a dude in the second round ... who wasn’t even written up in the book. Not surprisingly, the guy is now buried on the depth chart. I can still remember the phone conversation I had with my Dad after that, the transcript of which has been deleted!)
What I find most interesting about the lead up to the draft is all the analysis that has nothing to do with how the kid has played. Some of this is necessary, of course—it’s hard to compare Joe from Alabama with William from BYU. Each played against different competition and had different systems, etc., so teams have to look at things like 40-yard dash times, arm length, agility drills and more. And when players are eventually selected in the draft, much of that stuff is quoted as a reason why.
But then, as training camps start, a funny thing happens every year—many of the players who were so-called workout warriors and had all the measurables look pretty mundane. Meanwhile, some late-round draft picks (and even undrafted players) come in and look like real pros! In fact, as the years have passed, it seems like the evaluation process among NFL scouts has gotten worse and worse, with more first-round picks failing to live up to their billing, while many overlooked guys end up being leaders of their teams.
Former University of Oklahoma (and, briefly, Dallas Cowboys) coach Barry Switzer used to have a saying when some hot new recruit lit up the scoreboard during a practice: “He looks great, but can he do it when the band is playing,” meaning, can the player perform as well when there are 60,000 people in the stands and the pressure is on? That’s really the only question that counts.
I think a big thing that separates the teams that generally draft successfully from those that don’t is that the former give more weight to what really counts—namely, how the player actually did on the field, as well as a couple of select measurements that directly correlate to success in that team’s system. (If you’re a heavy passing offense, you shouldn’t be drafting a noodle-armed QB, etc.)
Too many scouts focus on how a prospect looked in the workout room or running drills in a T-shirt and shorts. In other words, in my humble opinion, talent evaluators are often focused on the wrong traits, which leads to wrong decisions.
I see the same thing happen in the stock market, whether it’s evaluating a potential new stock to purchase, or deciding what to do with something that’s already owned, or even trying to determine which way the market’s headed.
My experience is that most investors start with their eye on the ball—they look for a company with a big idea, solid sales and earnings growth and, usually, a strong chart. Good so far.
But then, once the stock is purchased and the investor has put money on the line, he starts hearing all sorts of news and rumors—some analyst downgraded shares, or insiders have been selling, or some other company offers up some competition. Or maybe the “news” comes from the market as a whole—a couple of bad down days can send most investors scurrying to safety.
None of this, however, is really meaningful. Remember, successful investing is all about having an edge. If you’re a value investor, it’s about having a system that identifies undervalued names. If you’re a growth investor, it’s about identifying some characteristics that most past big winners have had (rapid sales and earnings growth, revolutionary product, etc.). But no reliable system that I know of revolves around reacting to the day-to-day news and rumors surrounding a stock or the market!
Sure, it’s nice to have good news on your side, just as it’s good to know your draft pick ran a fast 40 yard dash or is excellent at the shuttle cone drill (a measure of agility). But just as those drills have only a loose correlation to finding a top-performing football player, most factors that investors read about are not important in terms of finding (and holding onto) big winners.
Once I buy a stock, I follow everything; I read the articles, listen to any rumors and even check Twitter to see if there’s any hubbub out there. I like to be informed and, besides, it’s part of my job.
But I only take action (a partial or total sale) if the stock itself (or, at times, the market) tells me to do so through abnormal activity. Obviously, identifying what is abnormal activity is the secret sauce, but the point is that, once you own a stock, pay close attention to its intermediate-term trend. If it’s up, don’t fret too much about all the other stuff out there!
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You should follow the action of the stock, and not the opinions, fears or hopes of pundits because that’s the only way you’ll ever develop a bigger winner. It’s a fact that every big winner has many shakeouts, pullbacks, corrections, base-building efforts and, yes, the occasional stinker of an earnings reaction. If you’re investing solely by feel, you’ll never hold on through all that turmoil. And if you do, you’ll probably also hold on for months after the stock has topped!
A classic example of this has been Qihoo 360 (QIHU), a name that began acting all hunky back in May. After the market’s correction ended in late June, I added it to the Cabot Market Letter’s Model Portfolio. The company is a leading provider of anti-virus software to nearly all of the PCs in China, as well as a leading provider of mobile security software for smartphones. And it also operates an app stores that’s very popular with many mobile game users (revenue from that segment shot ahead 181% last quarter, FYI).
But what really has investors excited is the company’s move into the paid-search market—Qihoo has a very popular Web browser, with millions of Chinese using its 360 website as their home page. So the company decided to build its own search service—and it’s been a huge success! From nothing 18 months ago, Qihoo has garnered about 17% of the Chinese search industry. To this point, revenues from paid-search are slow (less than 1% of the industry total), but that’s sure to mushroom as the company continues to gain share.
However, all of this stuff is known now, while at our buy in early July, it was not. And there were plenty of risks. Baidu, the Google of China, certainly wasn’t going away; that company made a big splash by purchasing the second largest app store in China a couple of months ago. Just a few weeks ago, Tencent, a gigantic Chinese online outfit, bought a big chunk of Sohu.com’s search engine, promising greater competition in the industry. And Qihoo itself sold $500 million of convertible bonds in late August.
I’m sure these developments scared out many investors during the past few months; I know I got my share of phone calls and emails asking if it was time to cut and run. But QIHU has absorbed all of them in fine fashion—it hasn’t even closed below its shorter-term 25-day moving average since June, rallying from 48 at our buy to nearly 95 in 10 weeks! In fairness, the Tencent acquisition did cause a quick shakeout in the stock (from 94 to 81 in just four days), but it’s held up well since then.
While I don’t advise jumping in with both feet at this time, I do think you could start a small position (say, half of what you’d normally buy, dollar-wise) in QIHU with a loose loss limit of 15% or so. Then, if the stock can power ahead in the coming weeks, you can keep nibbling on the way up. If this story plays out, I think the stock could still have lots of upside ... regardless of the news and rumors that float around.
To get further updates on QIHU and additional strong stocks with high growth potential in the months ahead, click here.
All the best,
Editor of Cabot Market Letter
and Cabot Top Ten Trader
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