A Rolling Crash in Growth Stocks
All Your Questions, Answered
A Top Growth Stock for Your Watch List
I'm in the middle of a chart series for my Cabot Wealth Advisories, but with the market's recent decline, I've gotten a slew of questions from subscribers in recent days. I'll pick up my chart series in a couple of weeks, but I thought it more timely and valuable to relay my answers to some of the most common questions I'm getting.
Here we go ...
Q: I've taken a beating in growth stocks of late, and I'm still holding many of them. What should I do?
A: The answer depends on your overall position. First off, as always, you should adhere to your stops and loss limits-I strongly advise against simply "holding and hoping" that everything will improve; it could, and I hope it does, but hope is a poor investment strategy. The evidence I see is that growth stocks in general have formed intermediate-term tops. That doesn't mean some won't countertrend, or that we won't experience some great bounces, but overall, growth stocks are in some sort of corrective phase.
Beyond simply cutting losses, though, you should be defensive when it comes to growth stocks. If you don't have much cash, you likely own many broken stocks; I would generally advise letting some air out of the balloon (so to speak) by selling your worst couple of stocks, and/or booking partial profits in any winners you have.
If, however, you've already pared back a bunch and are holding lots of cash, I also don't advise capitulating and bailing out of your remaining few stocks (assuming they aren't tripping your loss limits). I'm not predicting a sustained bounce, but the odds do favor many stocks being at better exit points during the near future.
Q: So, I know you're supposed to cut all losses short, but I let a few get away from me on the downside. Should I hold for a bounce?
A: I really believe in cutting losses-it's not just good for the portfolio, but good for your confidence. (Nothing ruins an investor's confidence more than a devastating loss.) If you really don't want to sell, I advise at least taking some off the table; selling half your shares at least gets you to take some action and respect what's happening with your stock.
Just remember that, in the long run, the whole secret to making money in the market is to lose small and win big. I know that your current trades always seem more important than those in the past or future, but sticking to sound concepts (like avoiding devastating trades) pays off over time.
Q: I've never seen such a meltdown before! What does it mean? Are we now in a bear market?
A: It's best to leave labels aside and just go with the evidence in front of us. As I wrote above, growth stocks have almost surely formed intermediate-term tops. And given the huge runs many had (especially some secondary-type names), it's likely some have topped permanently, while others will need many weeks or months to build new launching pads. That's usually how these things work.
But I would resist the urge to predict what's to come. When the market makes a dramatic move (up or down), most people start making outsized predictions. Instead, it's best to just take it day by day, week by week, and adjust to the evidence. I doubt growth stocks will simply bottom here and skyrocket, but I also doubt we're in for a major bear phase for the overall market. More likely, some correction and consolidation is possible, but again, I am not predicting that-just go with the flow.
Q: Seeing how far many of these stocks have fallen of late, isn't there a way to get out quickly next time? The drops hurt!
A: So this is a "yes, but" answer. There are myriad ways to sell "quickly," whether it's using divergences via stock indicators (MACD, RSI, etc.), setting modest profit targets and booking the gains when a stock gets there, or using tight trailing stops. All will help you avoid giving back too much of your gains.
However, such quick selling will come with a major cost-you will almost never be able to develop a bigger winner! Said another way, if you used these shorter-term signals to sell, you would have been knocked out of most of your stocks multiple times in 2013. Over time, it's hard to make big money if you're only munching on small profits.
Don't get me wrong; you should always strive to improve, and in the weeks ahead, when the emotions dissipate, I'll be reviewing my own trades, looking for things I could have done better on the buy side or sell side. But in trading, there's always a trade-off, so just realize that if you're going to try to develop some bigger winners, you'll likely take some heat when the major trend comes to an end.
One option to consider is to sell a small amount of your shares (25% to 33%) at a predetermined point on the way up for a modest profit, and hold the rest. Such a system can help you bank some profits while the getting is good.
Q: Should I buy some of these highfliers that have come back down to earth? Has business really changed that much? Aren't they bargains after dropping 20% to 35%?
A: While it depends on the stock, my general answer is no for a few reasons. First, I wouldn't assume these stocks are bargains-some might be, but you have to remember many of these stocks soared 200% to 400% during the past year or 18 months. Thus, while the recent dips have been very sharp and abnormal, it's not like these stocks have fallen for a year and are hitting new lows. Not even close.
Second, the names that broke hardest might bounce, but the odds strongly favor the next bounce or two being sellable (as we saw this week), and you have earnings coming up for many stocks in a couple of weeks. Some of the hardest-hit names have likely topped out for months if not longer.
Third, trying to bottom fish sounds easy but seldom pays well. I often refer to it as picking up pennies in front of bulldozers-yes, thinking of making 10% in just a couple of days is nice, but your timing on the buy and sell side has to be pristine to even make that. If you want to try, that's fine, but keep positions small and be quick to sell.
Q (Follow up from the last Q): But surely some of these stocks are going to come back, right?
A: Yes, absolutely, and that's where I believe everyone's focus should be. To this point, just about every growth stock has been trashed, but over time, you can be sure the wheat will separate from the chaff. (Earnings season will help separate future winners from losers.) Once the resilient names set up and get going, and once the market is behind them, the gains can be huge. For now, though, the prescription is watchful waiting, so we can identify potential future leaders as they begin to show themselves.
Q: In your video last week, you mentioned that many cyclical stocks are holding up well. Should I be buying these?
A: A little buying in some resilient oil, agricultural, semiconductor and transportation stocks is OK by me. Not only are many of these stocks holding up well so far, a bunch are either at the top of-or have already tried to lift off from-big launching pads. Moreover, these launching pads are very "early stage," meaning the stocks haven't done much for the past couple of years ... so there's room for a sustainable advance.
That said, be aware that most of these stocks aren't making great upward progress, they're simply resisting the market's downward pull-i.e., it's not like a lot of money is being made. Still, if you have a ton of cash on the sideline, a couple of small positions in some of these groups is OK.
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In my last Wealth Advisory, I mentioned three oil names to consider, and all three are still acting relatively well, especially considering the market. As I wrote above, there are many other commodity- and cyclical-oriented names that are doing OK, but I'm going to go back to my knitting today and give you a growth stock to put on your watch list.
The stock is GT Advanced Technologies (GTAT), which has historically been leveraged to the solar sector through its equipment that helps to produce solar modules and silicon used in solar cells. That's still a piece of its business, but GT is now emphasizing sapphire crystal production ... and has attracted one big customer. Here's what I wrote about the company in the latest issue of Cabot Top Ten Trader:
"GT has diversified its product pipeline to include not only equipment used to produce silicon wafers and solar cells, but also sapphire glass and the furnaces used to produce this material. Sapphire glass is a major competitor to Corning's Gorilla Glass in the mobile and smartphone touchscreen markets. Furthermore, GT scored a major contract on the sapphire glass front, striking a $578 million deal last November to supply the glass for the next generation of Apple products. Recent reports indicate that Apple may be ramping up sapphire glass production, with MacRumors and AppleInsider reporting that Apple is looking to expand its Arizona plant. While Apple has yet to specify how it will utilize GT's sapphire glass, a major investment in expanding product could provide a strong hint at the glass being used in the new iPhone 6. Lastly, the company's solar cell specialty furnace business is also thriving, with GT just announcing a $58.6 million order for high temperature refractory metal furnaces-proof that the company is leveraging its acquisition of Thermal Technologies. Sales and earnings are expected to explode starting in the second half of the year."
Indeed, on that last point, the stock looks very expensive-GTAT is up from 9 at the start of the year to 19 last week before pulling back. And it's only supposed to make 9 cents per share this year! However, this isn't another highflier about to get bombed-investors are looking ahead to huge second-half sales and earnings growth. Total 2014 revenues should rise 130% to $688 million, while 2015 is pegged at $1.15 billion, up 67%. Earnings for 2015 should approach $1 per share.
Fundamentally, my biggest hesitation is that GT is down the food chain a bit-as a supplier, it could easily see orders cut or delayed. That said, the story here is so new, and the money being thrown around so large, that I'm intrigued.
Also intriguing is that, despite the stock's huge run so far this year, it's actually holding up pretty well-it found support near 15.5 twice during the selloff in growth stocks, and is still well above its 50-day line. I'm not pounding the table on GTAT, but this is the type of new situation and story that could go far if/when the market turns up. You could nibble here with a stop in the mid-14s, or just put it on your watch list-the longer it can hold up, the better the odds it can help lead a new uptrend.
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Working to make you a better investor,
Chief Analyst of Cabot Market Letter
and Cabot Top Ten Trader
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