2014 Stock Trading in Review
10 Year-End Stock Investing Tips
A Little Known Growth Company
Usually this time of year is relatively quiet for me; our 10 Low-Priced Stocks Report for 2015 has been published (click here if you're interested!), I'm getting ready for the last Cabot Market Letter and Cabot Top Ten Trader issues of the year and I'm hopping to start/finish my Christmas shopping online.
The market, in other words, is usually pretty quiet, and even jovial, as we head into year-end. But not this year.
The market, which looked great after the super-powerful snapback from mid-October to early-November, has softened materially. First, we saw a lot of chopping around and some lagging by growth and small-cap names (characteristics that have haunted the market for much of this year) and then we saw selling pressures all over the market. And in the past two days, we've seen a rip-roaring rally.
Thus, today I want to relay a few points, not just about the current market, but about lessons we learned this year that will likely apply to 2015.
1. The name of the game with growth investing is to never lose big, and conversely, to occasionally win big. (Hence, cut losses short and let winners run.) The big example now is the dip in all things energy; while the drop seems extreme, the fact is that such big meltdowns happen a couple of times per year somewhere in the market. So even if eight out of 10 times it might seem better to not cut the loss, in the long run, it's better to get out and make sure you don't get caught in a disaster.
(As an aside, that's why I also preach trend following when it comes to market timing. Has trend following been frustrating this year? You bet! But in the long run, you're guaranteed to never miss a major upmove, and you're also guaranteed never to stay in a huge, prolonged decline. Sure, sometimes you get whipsawed, but that's the price of doing business, and the price is relatively small compared to catching-or avoiding-a big trend.)
2. About a year and a half ago, I noted that the secular (i.e., very long-term) bull market in gold was probably over-it topped in 2011 and has been weak ever since. And now oil is following the script, as are most commodities. Long-term, I think this is very bullish for equities-major, multi-year upmoves in stocks almost always correlate with sub-par action from commodities. With most commodities topped out, I think that means the next few years in general will be good for stocks.
I think this goes especially for growth stocks, which have performed just so-so in three of the past four years. Maybe this is "payback" for such a good run in the 1990s, but with interest rates likely to rise at least somewhat, and with commodities in the toilet, growth could be where it's at in the years ahead.
3. Notice, however, that I said "in general" and "the next few years." There has been a ton of what I call "late stage evidence" during the past few months ... things that normally occur in the eighth or ninth inning of a bull market. I'm talking about divergences between major indexes, lagging market breadth, a ton of stocks hitting new 52-week lows and lots of failed rallies (among both stocks and the indexes). Thus, I really am open to anything, even a bear market of some sort next year. Who knows, maybe the oil price collapse will "cause" it. That's not a prediction-in fact, I don't think the odds favor it-but I'm open to the possibility given what I'm seeing across the market.
4. That said, even if we do get a bear market, you shouldn't worry about a 2000- or 2008-style collapse. Anything is possible, but with two of the largest bear markets of the past century having occurred within a space of eight years, any bear move will almost surely be much better contained.
5.Though the market is still active, don't forget to do a little post-analysis of your stock action near year-end. It doesn't have to be a formal thing-it could be just sitting down with a piece of paper and writing down a few ups and downs from this year. The goal is to find any recurring weaknesses in your investing game, and eliminate them.
One word of advice, though, when you do look back: Try not to learn too much from any one year. For instance, 2013 was a great trending year, so you could have easily concluded that, in 2014, the way to go was to hold a stock until it really broke down ... to really let winners run. Well, obviously, the opposite strategy played out this year-it's been better to book every 15% profit! What you're looking for are recurring mistakes, possibly involving any big losers you accumulated.
6. And one more piece of advice: This year has been a tough one for trend-following growth investors, about as tough as I've seen due to the numerous failed rallies. In fact, in last week's Cabot Market Letter, I labeled 2014 as the "anti-precedent" year-many trades that historically work out seven out of 10 times have failed this year. However, the key is to not get discouraged or completely switch your systems. If you want to focus on less volatile stocks, or do some more partial profit taking, go for it-but don't morph into a day-trader when your real forte is intermediate-term.
7. Are there bargains in the energy sector (or any other beaten-down sector, for that matter)? The answer is (a) yes, most definitely, but (b) I have no idea what they are. If you want to engage in some bottom fishing in energy stocks, my advice would be to realize that, after this horrific decline, even a short-term, tradable rally (of, say, a few weeks) will probably need at least a little bottom-building effort. Thus, I recommend that you just keep an eye on a few institutional-quality oil stocks; the ones that perk up first, and possibly form higher lows as the group bottoms, will be the stocks to own. In other words, let the market tell you which ones to own, and at what time. Right now, there's nothing.
8. If I have one piece of advice for nearly every investor for 2015-I could do this better too-it's to have more of a plan with your trading. Think about it: Most of us plan our vacations, our trips to the grocery store, our estate or inheritance. But when it comes to trading, we often react. Your plan doesn't have to be 37 steps telling you exactly what to do in all situations, but it should help you take some of the emotion out of trading.
9. One part of your plan should be to favor liquid leaders that appear to be early (or, at least, in the middle innings of) their overall runs. I'm talking about stocks that trade north of $100 million per day, have a distinctly powerful new product or service, and haven't run up five-fold during the past couple of years. The more you can find big, liquid stocks that have something unique going for them, the better the odds your performance will improve, and without all the headaches that come from super-volatile, nothing-to-write-home-about stocks.
10. My most important piece of advice: Relax and have a fantastic holiday season!
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Market choppiness and selloffs are never fun, but as I've written many times, these selloffs make it easier to spot strength. If you have a company with a good, consistent growth story, and a chart that is not only resilient but relatively calm, it's telling you big investors have been hesitant to dump any shares, and were likely adding to their stakes during the market downturn.
One stock that fills the bill is Alliance Data Systems (ADS), which I wrote about in Cabot Top Ten Trader two weeks ago. Here's what I said in the issue:
"Alliance Data Systems is a behind-the-scenes company that has a great story and years of persistent growth. The firm is behind a ton of loyalty credit card rewards programs, private label retail credit cards and, because it collects mountains of user transaction data, a bunch of marketing services to clients as well. This is a global business, too; Alliance is behind the huge Air Miles program in Canada, for instance, in which more than two-thirds of that country's households participate! And the reason more and more firms sign up with Alliance is because it works-studies have shown that customers using the rewards cards that Alliance services spend more than others. Organic growth here isn't amazing-about 9% to 11% per year-but acquisitions help boost that figure, cash flow and margins are solid and the company isn't shy about buying back its own stock (it's bought back about 1.5% of its stock this year). Of course, if consumer spending tanks, business is likely to dry up, but earnings growth has been incredibly resilient for many years (including right through the 2008 bust), and analysts see 15% to 20% earnings growth for the next couple of years. It's a good, easy to understand story."
ADS has been in a big base since mid-March, with two big dips (one bottoming in May, one in October) that brought the stock down to 230. It rallied nicely after that October bottom, and, most interestingly, consolidated tightly during the market's recent maelstrom. And now, after the past couple of days, it's reaching toward its old high of 290.
With the market still so volatile, buying ADS is tricky. But, in general, a big, decisive push above 293 or so looks buyable, and you could even consider nibbling around here. In both cases, a stop in the 270 area (relatively tight, percentage-wise) should keep risk in check.
For more updates on Alliance Data Systems and to find out about additional momentum stocks featured in this week's issue, consider taking a risk-free subscription to Cabot Top Ten Trader. This year, we grabbed many double and triple-digit winners, including 303% gains in VipShop Holdings, 126% gains in Canadian Solar, 133% gains in Netflix, and we see many more strong stocks that have the possibility to be next year's winners.
Chief Analyst of Cabot Market Letter
And Cabot Top Ten Trader