How Scrabble is Like Investing
Best Disruptive Stocks
Cadence Pharmaceuticals (CADX)
The weekend before last I played 26.2 games of Scrabble—a veritable Scrabble Marathon.
First, because I enjoy the game.
Second, because my weekend was free.
And third, because the intensity of the Marathon was a new experience. Most weekend tournaments (I go to a couple most years) tend to run 15 or 18 games, and that often includes play on Friday night.
The Marathon was 26.2 games packed into Saturday and Sunday. That’s 13 games a day, packed into roughly 14 hours each day, with breaks for lunch and dinner.
And the .2 game? Instead of being limited to 50 minutes total, like a regular game, it was limited to 10 minutes total.
The chief downside of prolonged intensive Scrabbling for me was a sore back from too much sitting. There wasn’t enough time to do any serious walking.
The chief upside, as always, was playing a game I love with other people who love it.
And then there are the bingos.
A bingo is using all seven letters in your rack, which gets you a bonus of 50 points.
In my 26 games, these were some of the bingos.
Those are all good words. “Good” in Scrabble parlance means acceptable, which means the word is included in the official word list.
My games also included these non-good bingos, which were not challenged for various reasons, mainly because the opponent was not confident enough to challenge.
The most memorable bingo of the weekend was BOILOVER, which was played by one of my opponents. He had little confidence in it, but played it because it was plausible, and we were both surprised to learn that it was good.
Which brings me to the most common question people ask me about Scrabble. “Who decides what’s good?”
The answer is, a word is good if it’s included in all five of these collegiate dictionaries: The Random House College Dictionary, The American Heritage Dictionary of the English Language, Webster's New World Dictionary, Merriam-Webster's Collegiate Dictionary and Funk & Wagnalls.
Proper names are never good.
And why is Scrabble like investing? Mainly because a large part of a player’s calculations concern probabilities.
Competitive players don’t simply put down their highest-scoring word each time.
They work to build racks that can create bingos mainly by keeping a balance of consonants and vowels, and favoring the letters AEDILNORST (and, of course, the blanks), while ditching the tougher letters quickly, especially Q and J.
The better their letters, the better their probability of playing a bingo.
They keep track of which letters have been played, so they know what’s still in the bag.
Knowing what’s in the bag, they know the probability of drawing good letters.
And near the end of the game, they know exactly what’s on their opponent’s rack!
Lastly, when they play, they try to put words in places that don’t give their opponent an easy chance to score a lot of points.
All this involves calculating probabilities, if not by using specific numbers, at least by judging what is more likely to occur.
And that’s what the best investors do too.
For example, most growth investors understand that stocks in uptrends are more likely to keep going up. But they know that stocks in parabolic rises, or stocks that have already had a very large advance, are at risk of topping out. So they try to buy relatively early in established uptrends.
Most value investors understand that stocks bought at the low end of their historic valuation range are likely to eventually trade higher. But they know that some stocks keep going down, and the risk is greater if a business is struggling. So they try to pick high-quality companies whose stocks are temporarily down.
This is what exactly what our value expert Roy Ward does with Cabot Benjamin Graham Value Investor. And unlike Scrabble players, Roy does use specific numbers to calculate virtually everything he can about a stock. There’s no guesswork involved, just precise, dependable numbers. Last year, Roy’s average gain for stocks sold in Cabot Benjamin Graham Value Investor in 2013 was 51.1%! Over 10 years, Roy’s model portfolio returned 101.2% compared to the Dow’s increase of 58.6%.
Moving on, it’s time for the fifth installment of “Best Disruptive Stocks."
Ideally, these are companies that address a mass market, and thus have the potential to impact our lives for the better.
Ideally, these companies are young and not yet well known or well respected. Thus they have the potential for increased perception by investors as time goes by.
Ideally, these stocks are young and not widely owned. Thus they have the potential to be bought by more investors—especially institutions—and thus see their stocks soar over time.
All the Cabot editors have made contributions to this list of 10, and the stocks are being presented in no particular order, though I am trying to feature them when they’re at good entry points. I hope you enjoy them.
Disruptive Stock Number Five
Cadence Pharmaceuticals (CADX)
Cadence’s only previous appearance in a Cabot advisory was in December 2011, when it was one of the 10 stocks featured in Cabot’s Ten Best Low-Priced Stocks for 2012. At the time, it was trading for less than 4 a share. One month later, it was up 20% and six months later it was up 76%.
So that worked out pretty well.
Today CADX is trading above 11, so it’s just climbing into the territory that makes it a candidate for our “regular” Cabot advisories. This is also the territory where institutional investors are likely to support the stock, if they see a story they like.
And I think they do, because Cadence’s story is about a mass market most people can identify with.
Specifically, Cadence has a drug called OFIRMEV that’s an intravenous form of acetaminophen. Acetaminophen, of course, is well proven as a pain reliever, and the advantage of this form is that it can be administered in controlled doses intravenously, by hospitals. Additionally, it can be combined with opioids to treat more severe pain, in the end reducing the usage of opioids.
The big reason for reducing opioid use is to reduce the risk of addiction and the consequesces that it often leads to.
Since OFIRMEV was launched in January 2011, it’s been used to treat more then two million patients. It’s distributed by all the big drug providers. And usage is growing.
Cadence has been a money-losing company until now, but it’s right on the verge of profitability—another factor institutions value highly.
Fourth-quarter results (pre-announced) saw revenues of $33.3 million, bringing 2013 revenues to $110.5 million. The loss in the fourth quarter may have been a few pennies. But for 2014, analysts are projecting a profit of $0.09 per share!
The combination of story plus chart tells me CADX has great potential, and I’ll definitely be watching this one.
But getting into the stock at the right place—especially for low-priced pharmaceutical stocks—can be tricky. And if you choose to bite on CADX, I’m afraid you’re on your own, for now. But I hope some Cabot advisory covers it in the future.
Alternatively, I recommend a look at Cabot Top Ten Trader, which is a great source of hot young stocks, and will give you specific buy/hold/sell advice every week on all the stocks it follows. If you like action, you’ll love Cabot Top Ten Trader.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
and Publisher, Cabot Wealth Advisory