Growth and Value Stock Number Seven

 
Stock Market Video

Growth and Value Stock Number Seven

This Week’s Fortune Cookie

In Case You Missed It

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In this week’s Stock Market Video, I talked about the shift in the market’s direction. Despite the major indexes’ strong uptrends, many of the growth stocks that have provided leadership during the past months are pulling back. Investors are showing more of a preference for more defensive stocks, giving support to energy and transportation stocks. There’s lots of nervousness in the market, and stocks that disappoint in their quarterly reports are being treated very roughly. So keep your sell disciplines sharp. I also talk about some differences between buyable pullbacks and ones that should flash a warning light.

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Growth & Value Stock #7

This series about Growth/Value stocks has featured a group of companies whose fundamentals make them attractive to value investors, but only if the price is right.

With Northrop Grumman (NOC), we come to a stock that illustrates a point of real conflict between value and growth investors.

When Roy Ward, the number-crunching power behind Cabot Benjamin Graham Value Report, included Northrop Grumman in his October list of “275 Top Value Stocks,” NOC had already outrun the strict limits that the value discipline imposes for buying and selling.

Roy said that NOC would be a good buy at a Maximum Buy Price of 59.59. Given that the stock has been trading over 100 in the last couple of weeks, I’d have to say that yes, that would be a very good place to buy it.

Unfortunately, NOC hasn’t been trading under 60 since June 2012.

The fortunate investor who bought NOC at its value price of 59.59 would have waited until the stock reached its Minimum Sell Price of 90.69, which happened in July 2013.

While the stock was making that upmove, value investors would also have enjoyed the company’s quarterly dividend that paid an attractive 2.3% forward annual dividend yield.

But here’s where the story gets interesting for a growth investor. Northrop Grumman was first featured in the June 17, 2013 issue of Cabot Top Ten Trader. On that day, NOC closed at 84.

By the time NOC made its second appearance in Cabot Top Ten Trader (October 28, 2013), the stock had soared to 108, which is just about where it’s likely to close for the week. So, if a value investor had sold NOC when it tagged 90.69 in July, they would have missed out on a stock that ran from about 91 to 108, with no apparent limits on how high it might go. Here’s a chart to illustrate. The month on the far left is June, 2012, when the stock left its Maximum Buy Price behind.

I know that situations like this are what separates the value investors from the growth people. The essence of the value strategy is risk control, and it’s the accumulation of predictable gains through a widely diversified portfolio of undervalued stocks that gets the job done over time. For growth investors, a good story, sound fundamentals and a chart with some evidence of buyers stocking up on the stock is the ideal. And Northrop Grumman certainly fills that bill. Cabot always says that you can make money in any investing style if you follow the rules. And that’s why we offer investing advisories that span different strategies.

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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s Comment: Lynch was famous for not timing the market—for staying fully invested at all times—and with good reason. His Fidelity Magellan fund was too large, once he got famous, to be able to do anything but stay fully invested. And he's right about the average investor. Following their emotions, they typically do exactly the wrong thing. Happily, Cabot's unemotional system does allow individual investors to time the market successfully, and in the process, beat the fully invested professionals!

Paul’s Comment: It takes courage, and a certain amount of discipline, to take what’s happening in the market at face value and ignore the teams of economists and market gurus who try to anticipate the future. The future will get here soon enough, and being able to tell a bull market from a bear is all the information you need to set your sails for the current conditions.

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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 10/28/13—One Hot Stock

Tim Lutts, head of Cabot Stock of the Month, uses the story of Red Sox hero Curt Shilling to make a point about overconfidence. Shilling tried to parlay his fame (and considerable fortune) into a profitable video game business. Stock discussed: SunPower (SPWR).

Cabot Wealth Advisory 10/29/13—Getting Started in Investing, Part II

Chloe Lutts Jensen, the head honcho of Investment Digest and Dividend Digest, shares investors’ stories about how they got started in stock investing and where they got their information and rules. The importance of a good mentor is huge!

Cabot Wealth Advisory 10/31/13—It’s Soooo Scary!

I wrote in this issue about one of my dire experiences with investing and how market timing can take a little of the scariness out of growth investing. I also give the fifth in my series of stocks with both growth and value characteristics. Stock discussed: Magna International (MGA). 

Have a great weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
and Editor of Cabot Wealth Advisory


Paul Goodwin can be found on Google Plus.

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