The Danger of Holding Too Much Cash
Two Conservative Advisories
Best Revolutionary Stocks # 3
The following email came into our office recently, addressed to Paul, but actually appropriate for any Cabot advisor.
"Paul, I'm looking for advice.
My broker(s) are fed up with me because I am in cash in the form of CDs and precious metals in overseas vaults.
I'm going to be 69 in a few months and I don't feel in any way safe in the stock market. I have lived through '87 and '08 and the bursting of the Nasdaq bubble and lost a whole lot.
My financial goals are for my husband and I to die in bed without wanting for anything. I am debt-free, well employed through 2017, possibly longer, depending on the way the world goes. I'm saving 25%-30% of my income and calling it my "growth sector."
I'm 80% in cash, 20% in metal-and that was 30% metal before the decline of the last three years.
Once I "retire," if I use my current savings, and reduce my cost of living by about 25%, I could probably get through the next 20 years just fine. If metals go "to da moon" I'll be laughing and throwing pool parties. But I'm not crazy-happy about reducing that not-so-flamboyant cost of living.
I have asked both my brokers to consider what investments I could make if the market corrects by 30%. I'm thinking that I could pick up dividend stocks or blue chips at good prices that would provide, say, 5% income.
What do you think?
Which of your advisories would be appropriate for me? Thanks for asking for questions! And for your time.
I told M.P. that I would answer her question here, given that it addresses some universal concerns. The good news is that she's saving 25%-30% of her income right now. Saving is the first step to a secure retirement and that's a very impressive percentage. The bad news is that she's proven herself a bad investor in the past and she's proving herself a bad investor today. She's missed at least the last three years of the current bull market-perhaps more-and now she's waiting for a 30% market drop, with the aim of picking up stocks (blue chips, no less) yielding 5%! Well, if she waits long enough, she will get her 30% correction, but I doubt she'll be able to find blue chips yielding 5%. In the meantime, she could miss a lot of upside. Plus, she's losing money in precious metals! And she's losing ground to inflation!
So why does she have money in precious metals?
Perhaps she's listened to some preacher of doom-and-gloom who claims it will be the last refuge of value when our financial system falls apart (or something slightly less apocalyptic). Perhaps it's a deep belief in the value of real things.
But the long-term record of precious metals as an investment is not good, while the long-term record of the equity markets is. Equally important, given that she's asking which Cabot advisories would be appropriate for her, none of our experts are advising holding precious metals now.
And why does she have so much in cash?
Because she's afraid of losing money in common stocks. Most likely, given the market's advances of recent years, she concludes stocks are too high now (thus too risky), and has resolved to wait until they pull back.
I can see why her brokers are "fed up."
So I wonder-what can I recommend to M.P. that she will listen to, given that she won't listen to her brokers?
I can remind her that diversification is the most important tenet of investing, and that a far more sensible portfolio might be 20% precious metals, 20% cash, 20% bonds, 20% blue-chip stocks and 20% real estate.
Presumably she already has the real estate. Her main problem is that she's sitting on too much cash, and she's afraid to use it.
So, my two suggestions are Cabot's most conservative advisories, both of which will enable her to grow her assets with low risk for years to come.
The first is Cabot Benjamin Graham Value Investor, led by value expert Roy Ward, who recommends a diversified portfolio of undervalued stocks, using a strict discipline.
Since its inception on 12/31/95, Roy's Cabot Value Model has provided an impressive return of 1,139.2% compared to a return of 594.9% for Warren Buffett's Berkshire Hathaway. During the same 19-year period, the Dow has gained just 248.4%.
Roy's typical investment is held for two years, but sometimes it's three years and sometimes it's just one, as with Roy's recent sale of Trinity Industries. Here's what Roy wrote back on June 4:
"Trinity Industries (TRN 80.95) climbed to an all-time high of 87.89 on May 30 before falling 10% to 79.10 this morning. After recommending that investors place a trailing stop-loss sell order at 10% below the daily high price on May 30, I now advise selling TRN. Trinity was first recommended using the Classic Value approach in the July 2013 Cabot Benjamin Graham Value Investor at 36.94. TRN has advanced 114.1% during the past 11 months compared to a gain of only 17.7% for the Standard & Poor's 500 Index during the same time period. Sell TRN now."
Since then, TRN has split 2-for 1, and as I write today, the stock is trading under 29, down more than 30%. I think you'll agree that was a very good call.
More recently, on December 1, Roy wrote:
"Dollar Tree (DLTR 68.36) reached its Minimum Sell Price of 68.63 on Friday, November 28. Dollar Tree was first recommended at 20.82 in the July 2010 Cabot Value Model using the Modern Value analysis. DLTR has advanced 229.6% during the past 53 months compared to a much smaller gain of 92.7% for the Standard & Poor's 500 Index during the same time period. I recommend selling DLTR now."
The stock is a little higher now, but it's very much in the news thanks to its attempted acquisition of Family Dollar (FDO), and high-profile stocks are seldom great values.
Also on December 1, Roy wrote:
"Magna International 'A' (MGA 107.65) exceeded its Minimum Sell Price of 107.19 on Friday, November 28. Magna International was first recommended at 43.04 in the October 2010 Cabot Enterprising Model using the Undervalued Canadian analysis. MGA has advanced 149.1% during the past 50 months compared to a smaller gain of 77.4% for the Standard & Poor's 500 Index during the same time period. I recommend selling MGA now."
Since then, MGA has been up to 112 and down to 102, and now it's back where it was a month ago, while Roy has steered his readers to new undervalued stocks. If Roy's method seems like one that will work for you, you can learn more here.
The other Cabot advisory I suggest is Cabot Dividend Investor, which is led by my daughter Chloe Lutts Jensen, who designed a system of evaluating and combining dividend-paying securities in response to Cabot reader demand.
Since the advisory's debut in January, it's fulfilled its mission exactly, bringing readers a total return of 7.7%. Plus, it now yields 3.7% on cost. Chloe's recommended portfolio is composed of three tiers, the High-Yield Tier, the Dividend Growth Tier and the Safe Income Tier.
Aggressive dividend-seekers who want to take on a little more risk can gravitate toward the High-Yield Tier, which currently yields 8.06% on cost, and has components like Main Street Capital (MAIN) and Omega Healthcare (OHI), while risk-averse investors (like M.P.) can lean toward Chloe's Safe Income Tier, which currently yields 3.72% and has components like DuPont (DD) and Target (TGT). If those dividend yields float your boat (I think they may be perfect for M.P.'s situation), you can learn more here.
Bottom line: Holding cash is not a successful long-term investment strategy, especially in a society where values are generally rising and inflation reduces the value of cash.
I wish M.P. good luck finding an alternative.
10 Revolutionary Stocks
Moving on to my series of 10 Revolutionary Stocks, it's time for number three.
The ideal revolutionary stock belongs to a company that is changing the world, and that will see great growth of both revenues and earnings for years to come, but whose growth potential is underappreciated by the majority of investors today.
If you buy right and hang on, one or two revolutionary stocks can make a huge difference to you portfolio.
Previous revolutionary stocks, just off the top of my head, include Amazon, Apple, Blockbuster, eBay, Google, Green Mountain Coffee Roasters, Home Depot, IBM, McDonalds, Microsoft, Netflix, Oracle, Qualcomm, Research in Motion, Starbucks, Tesla Motors, Teva Pharmaceuticals, Walmart, Whole Foods, Yahoo! and Xerox.
I chose the current group of 10 revolutionary stocks by surveying all the Cabot analysts and culling their suggestions to the 10 I liked best, based on both story and chart.
So here's number three!
GoPro is a California company that makes and sells digital video cameras that can be mounted on anything, including cars, motorcycles, surfboards, drones, helmets, small children and animals.
Lots of them were under Christmas trees last week.
Here's what I like about this company and why I think it will lead the revolution.
A few decades ago, the leading companies in the photography business were Kodak, which had virtually created the industry, and Polaroid.
Then digital photography came along and the old giants failed to adapt. They were too busy protecting their legacy products. Before long, Canon and Nikon ruled the business, while Olympus, Panasonic, Pentax, Samsung, Sony and Minolta all played catch-up.
And now history is repeating itself, as GoPro has singlehandedly created this new video photography category, and leads its competitors by miles!
GoPro had revenues of $234 million in 2011, $526 million in 2012 and $986 million in 2013. It has number one name recognition, backed by expert execution and marketing.
And it has yet to penetrate foreign markets deeply, as 57% of its revenues come from the Americas.
Analysts are projecting that the company will grow earnings 87% this year and 23% next year, but I think management, which has proven extremely far-sighted and capable, will surprise with some major strategic move-perhaps into the drone business.
So the story is top notch, but what about the chart?
GPRO was very hot this summer, coming public at 24 in June, jumping to 50 by July and then pulling back below 40 in early August.
That's when I named it my favorite stock at the Cabot Investors Conference. (Maybe you'll come next year? Click here for details)
It zoomed to 98 in early October, and since then, profit-taking has dominated, as the stock cooled off. It's a natural cycle, entirely normal.
The stock got as low as 55 two weeks ago, but buyers stepped in last week and I'm optimistic the next leg will be up, not least because of the positive economic news that low oil prices have left more money for consumers to spend on gadgets like GoPro cameras.
Also, sometime in January, we'll learn how many cameras were actually placed under Christmas trees for the holidays.
But even better than a $400 camera might be six shares of GPRO stock!
It that makes sense to you, feel free to take the plunge here. Just note that I may not mention GPRO again. If you want regular updates on the stocks you own, it's better to become a reader of one of our expert advisories. And if you want the most growth-oriented of all, you want our flagship Cabot Market Letter, which has been advising investors how to make money (and not lose it) since 1970!
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory