It’s Soooo Scary!
Get Your Fear Under Control
Growth & Value Round 6
Investors … not so much. To judge by the surge of fresh horror films in theaters, Creature Features on TV and haunted houses in cities and towns across America, people really enjoy being scared. And they’re willing to pay money for the adrenaline-pumping experience.
What investors want is a nice steady rising market in which everything goes up. And the more the market goes up, the more additional investors will jump on the bandwagon, encouraged by the rush of upward momentum and the drumbeat of profits.
I know more about this process than I want to because I was a heavy investor in the hottest of the hot tech funds back in the late 1990s. The company where I was employed kept rolling out new tech sector and industry funds that were soaring like helium balloons. And I kept putting my profit-sharing bonuses and 401 (k) allocations into them.
I expect you know how that ended. What you may not know is that my fellow employees were all doing exactly the same thing. And when March 2000 rolled around and the markets started the agonizing process of stumbling and lurching toward what proved to be a massive correction, we continued to do exactly the same thing.
Which was nothing.
We all just sat and watched while our account balances dropped like the fuel gauge in a Hummer. Horrified. Paralyzed. Poorer. So when I came to Cabot in 2005, I had experienced all the scary market action I ever wanted.
Intellectually, I knew that Cabot’s market timing disciplines would allow me to get into the market when times were good, but get me (and my money) out when markets were heading down. But emotionally, I took a lot more convincing. In fact, it wasn’t until I saw how Cabot’s system performed during the Housing Bubble meltdown that I really began to believe in my heart.
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During the 2008 market face-plant, I had the portfolio of Cabot China & Emerging Markets Report fully in cash for several months while the Cabot Emerging Markets Timer was flashing an emphatic red light.
Looking back, it’s almost surprising how satisfying it is to be 100% on the sidelines while markets are in Hindenburg mode. It’s not quite as satisfying as riding a bull market higher, but it’s close.
And the part about market timing that I don’t talk about quite as much is that the Cabot market timing techniques also got our growth advisory subscribers (Cabot Market Letter, Cabot Top Ten Trader and Cabot China & Emerging Markets Report) back into the market in short order once March 2009 rolled around. So, if talking heads forecasting disaster on TV, Internet commentators predicting bear attacks or mailed warnings about “the investment apocalypse that’s going to sink us all” have you spooked, take heart. Cabot’s market timing disciplines have stood the test of time—and several market meltdowns—and will give clear signals for when to trust the bull and how to get out of the way of the bear. It’s one of the things we do best.
You can continue to get your thrills from movies you can turn off and enjoy your heart-pounding gasps from fake ghouls and zombies. But the markets won’t really be scary any more. All it takes is a click right here to get fear under control.
My stock pick today, the sixth in my series of stocks that share both growth and value characteristics, is Magna International (MGA), an automotive parts company that was featured in Cabot Top Ten Trader on August 26, 2013.
Now, a stock’s appearance in Top Ten is not to be taken lightly. It means that out of the thousands of stocks in the entire market, that stock possesses the price appreciation, liquidity, sound fundamentals, appealing story and momentum to put it at the top of the growth universe.
So when a stock from Top Ten also appeals to the finely tuned value sensibilities of Roy Ward, the analyst behind Cabot Benjamin Graham Value Investor, I get intrigued.
I asked Roy to write an updated analysis of Magna International, and here’s what he supplied: Magna International ‘A’ (MGA: 84.61) Max Buy Price is 72.06; Min Sell Price is 95.46
MGA, with headquarters in Aurora, Ontario, is an independent supplier of original equipment components, assemblies, modules and systems and related tooling for cars and light trucks. The company designs, develops and manufactures products for North American and European original equipment manufacturers.
The world’s major automakers are progressively outsourcing complete vehicle systems to large parts makers. Magna’s vast size and capabilities are winning market share from smaller rivals which will likely continue in the future. The company is also actively acquiring companies that are adding growth, profitability, and immediate earnings.
Second quarter sales increased 16% and EPS climbed 20%, easily beating my forecast. Magna is clearly taking market share from competitors at a time when car and truck sales are robust in North America. I expect sales to increase 6% and EPS to rise 16% for the next 12 months ending 9/30/14.
At 12.3 times forward EPS and with a dividend yield of 1.5%, MGA shares are attractive but somewhat overpriced. MGA’s balance sheet is strong with minimal debt. Hold. Written July 11, 2013. Updated October 16, 2013
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Magna is now trading at around 84, which makes it a little overpriced to buy as a value stock. But it is still being followed on page 12 of Cabot Top Ten Trader, which means it’s still working as a growth stock.
Here’s what Mike Cintolo had to say about Magna International in the August 26 issue of Top Ten.
Why the Strength: Magna International is riding the worldwide recovery in auto production. The company is a massive ($32.8 billion in annual revenue!) auto supplier, with more than 120,000 employees; its products include body, chassis, powertrain, closure, roof systems and much more. Thus, if the auto sector is ripping higher, Magna will do well, and that’s exactly what’s going on now. The firm’s second quarter report was another sparkler, with revenues up a solid 16% (compared to vehicle production gains for the industry of 7% in North America and -1% in Europe), and continued efficiency gains pushing earnings up 20%. And after the top brass indicated that the rest of the year looks good, analysts quickly hiked their earnings estimates (now $6.13 per share for this year, and $7.30 in 2014); that leaves the stock with a mild P/E ratio of 13 for this year, to go along with a decent 1.6% dividend yield. Clearly, Magna isn’t changing the world, but after years of sluggish sales, it’s possible the world economy accelerates and auto sales keep kiting higher, which will continue to boost Magna’s results. Investors are betting on it.
Technical Analysis: MGA has been in a beautiful, 45-degree uptrend during the past few months, cranking higher along its 25-day and 50-day moving averages. To be clear, the stock isn’t in the very early stages of its advance, however, this impressive upmove came after a 27-month consolidation, so we can’t say the end is necessarily nigh, either. The stock recently popped on earnings and has tightened up in recent days. Given its pattern, you could buy some shares here, but a dip toward the 25-day line (now at 78) would be a better entry.
Magna will report its third-quarter results before the market opens on November 6, which is next Wednesday. And the results will likely set the immediate direction for the stock’s price. But Roy Ward’s evaluation of Magna International as a value issue is a strong sign that MGA will eventually wind up in the mid-90s, where its fundamentals say it belongs.
You heard it here first. From two directions.
Chief Analyst of Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory
P.S. Now is a good time to invest in strong growth stocks and Cabot Market Letter can help you find the next market leaders. With our market timing indicators flashing green lights, we’re seeing big potential for our stocks in the months to come. Learn more about the stocks featured in our portfolio including a leading stock that’s quickly becoming the Yellow Pages of the Internet and has huge profit potential.