Change Is On the Way ... Always

 

Stocks with Strong Stories: Stock Market Video

Change Is On the Way ... Always

This Week's Fortune Cookie

In Case You Missed It

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In this week's Stock Market Video, I point to the pronounced weakness of the S&P 500 and the Dow, compared to the relative stability of the Nasdaq and the moderately strong action of Chinese stocks. It's a good time for a little caution, and I limit my stock discussion mostly to big companies with strong stories that are the favorites of institutional investors. Flush your losers, take a little profit and buy on weakness. Click below to watch the video. 

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Change Is On the Way ... Always

"Everything changes and nothing remains still ... and ... you cannot step twice into the same stream"-Heraclitus (a Greek philosopher of the fifth century BCE)

It would be nice to be absolutely certain about anything in the business world, but things just don't work that way. Companies wax and wane like the moon, up one quarter and down the next. National economies are on a constant roller coaster, running over a course of years, not quarters.

If you've been around for a while, you're used to local businesses, especially restaurants and other small enterprises, just sticking a sign in the window that says, "Going Out of Business." And that's exactly what they do.

Local stores are one thing, but national chains ought to be something else entirely. We don't expect signs in the windows of major companies, especially if they are public companies whose stocks we have bought.

And yet, that's exactly what happens, more often than you might think.

I was reminded of this major truth recently by an article about companies that have, after periods of real prosperity, winked out of existence like shooting stars.

Take, for instance, Coldwater Creek, a women's clothing company that just filed for bankruptcy in April and whose stores are even now liquidating their merchandise and fixtures. Back in 2004 and 2005, Coldwater Creek's stock, symbol CWTR, was powerful enough to make three appearances in Cabot Top Ten Trader, which is the equivalent of making Billboard magazine's weekly chart of the most popular tunes.

I actually wrote the WHY THE STRENGTH analysis for Coldwater Creek's page in the August 1, 2005 issue of Top Ten. Here's what I had to say.

WHY THE STRENGTH?

"Coldwater Creek has a clear focus: sell clothing, accessories, jewelry and gifts to women between 35 and 60 who make over $75,000 a year. It markets through catalogs, via the Internet and in retail locations and keeps the emphasis on products that are current, but not trendy. Direct sales account for more than 60% of revenues, with catalog sales slightly ahead of e-commerce sales. Sales through retail outlets account for the balance."

But somewhere along the line, this 30-year-old company either lost focus or failed to change with its target audience or fell victim to a competitor's superior vision. Stuff happens.

Among the other high-profile corporate deaths in the past decade are Circuit City (d. November 2008, age 60), Blockbuster (d. September 2010, murdered by Netflix and its own intransigence), Borders (d. 2011, and once my own favorite bookstore), Tower Records (d. 2006, a victim of the digital revolution) and Filene's Basement (d. 2011, the oldest discount retailer in the U.S. and the source of some of my favorite neckties).

When a restaurant goes out of business and we haven't eaten there, my wife and I often jokingly blame ourselves. But all of the fatalities above were stores that I visited often. So I'm not taking any responsibility.

The lesson behind this excursion into Chapter 11 territory is that the landscape of the corporate world is constantly in flux. The only company in the original 12 Dow Jones Industrial Average from 1896 that's still doing business under the same name is General Electric.

The takeaway is that it's not a good idea to get too attached to any one company or stock or even to a particular market move. Having favorites is a temptation to hold onto a position too long, which is a major sin. And keeping stocks that you love in your portfolio when they are losing you money is an even bigger sin.

But the cardinal sin is staying heavily invested during a market downturn, letting your heart rule when your brain is telling you to head for the exits. That's a sin that can do real damage.

So accept the transitory nature of companies, stocks and bull markets and do what you must to hold onto your money when changes come. As Heraclitus might have put it, "You cannot invest in the same market twice."

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P.S. The good news is that sometimes things change for the better, which is always a nice surprise in the dog-eat-dog world of business.

As an example, there's the venerable U.S. Steel (X), a one-time giant of American industry that got chewed up over the long haul by foreign imports and in the short run by the Great Recession. This chart shows the bad news from June 2008. (Fair disclosure: This disastrous fall came after X had rallied from 10 in March 2003 to 187 in June 2008, just before the bottom fell out. So U.S. Steel was on the move before the Bubble burst.)

But a long-term chart like this one can conceal as much as it reveals. This chart of X's last six months tells a very different story.

For growth investors, those who search for strong short-term trends and love to find stocks that are enjoying improved reputations, this chart for X is like catnip. In fact, X was featured in Cabot Top Ten Trader (the ultimate seal of approval for a growth stock) twice in 2013 and again just last Monday.

If you'd like to see what Mike Cintolo had to say about U.S. Steel in Top Ten, and to see additional momentum stocks, consider taking a trial subscription to the advisory. Get more details here.

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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: Over the years, I've seen plenty of investors' portfolios, and I've noticed that people like to hang on to stocks long after they should have been sold. They think, "It will come back." But in fact, these dead stocks clutter a portfolio and they clutter the investor's mind as well. I much prefer a clean portfolio full of stocks that are working. If they're not working, out they go.

Paul's Comment: I've always liked the proverb that says, "Hope is a great breakfast, but a sorry supper." That means that buying with hope in your heart is fine. But if hope keeps you tied to the Titanic, it's not a good thing.

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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 8/4/14-Three Reasons to Be Cautious Today 

Tim Lutts, Chief Analyst of Cabot Stock of the Month, follows up on his earlier discussion of the Pareto Principle and discusses three indicators that signal a possible turn in the market.

Cabot Wealth Advisory 8/5/14-Best Canadian Dividend Stock 

Cabot Dividend Investor's Chief Analyst Chloe Lutts Jensen also takes a look at signs that might indicate the start of a new bear market and why probabilities are not much help in deciding investment strategy. She also gives the fourth in her series on Best Canadian Dividend Stocks. Stock discussed: Bank of Montreal (BMO).

Cabot Wealth Advisory 8/7/14-Wise Sayings Winner Announced

In this issue, I announce the winner of my "Wise Sayings" challenge in which I asked for your favorite maxims about investing and life. I also recommend a Chinese stock that I've had in the Cabot China & Emerging Markets Report portfolio since January. Stock discussed: Vipshop Holdings (VIPS).

To stay interesting, stay interested.

Have a nice 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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Cabot Wealth Advisory

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Four Fed presidents gave speeches yesterday, and every word was digested by the stock market in an attempt to better predict the Fed’s next move. With odds of a December rate hike now about even, how should stock investors prepare?Read More >

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The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >

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