Revolutionary Stocks Survey Results
Well Known vs. Unknown Stocks
A Network Security Provider
Last week, reviewing the 10 Revolutionary Stocks I'd presented over the previous 10 weeks, I asked you which ones you owned. You answered (at least enough of you did), and today I present the results, starting with this graph.
Alibaba (BABA) is the clear favorite. It was owned by 39% of respondents! Coming in second and third were Tesla Motors (TSLA) and LinkedIn (LNKD). And the reason for the high ranking of these three seems obvious; those are high-profile names.
Alibaba had the biggest IPO of all time last September and is nearly guaranteed to be the Amazon/eBay/PayPal of China for years to come. LinkedIn has revolutionized the world of professional networking and job-hunting and its future is very bright. And Tesla Motors (whose Model S was just named the Consumer Reports Top Pick for the second year in a row) is leading a revolution whose aim is to obsolete the internal combustion engine in automobiles. (Plus, CEO Elon Musk is often compared to Steve Jobs. Who can even name the head of LinkedIn?)
To some extent therefore, the results of this survey reinforces the common wisdom that the stock market is a popularity contest.
And the two clear laggards in my survey reinforce this point. Centene (CNC) and Hain Celestial (HAIN) simply don't make headlines. (To refresh your memory, Centene is thriving by providing health-care services to under-insured people under Obamacare, while Hain Celestial is the biggest distributer of organic foods in the U.S.)
Because they don't make headlines, most investors don't know about them and thus most investors don't own them.
But here's the irony.
The stocks of Centene and Hain have been hitting new highs in recent weeks, while the stocks of Alibaba and Tesla have been hitting new lows.
Why is this?
Because both BABA and TSLA have already been through the cycle of high visibility, high stock ownership and high prices, and now those stocks are cooling off, as short-term investors slowly give up on the stocks and move on to greener pastures. For BABA, the downtrend is now four months old, while for TSLA, it's now six months old.
Odds are, therefore, that a lot of the respondents who own these stocks are under water. I know from experience how common it is for readers to hang on to losers with good stories.
In the meantime, the stocks hitting new highs, CNC and HAIN, are still (slowly) growing in popularity. To me, that's a very powerful reason to favor these stocks today, especially if you believe that Obamacare will continue to grow in scope and the movement to organic foods will continue to grow.
Lastly, there's one more notable data point in the graph and it's this.
A full 28% of respondents own none of the recommended revolutionary stocks.
Over 10 weeks I presented 10 stocks that are quite likely, overall, to do very well over the years as they change the world-and even in this bull market, where most stocks are going up, 28% of respondents don't own even one of them!
Your comments varied. Some of you had owned them earlier and sold out, often at a loss. Some of you consider yourselves too old to be making long-term investments. Some of you consider these stocks too expensive, or their charts too extended. And some of you only buy dividend-paying stocks.
Bottom line: You are all individuals, with differing goals and differing circumstances. Some respondents have bought all 10 of the stocks, but many have bought none, and that's totally appropriate if these revolutionary stocks are a bit rich for your blood.
If so, I might suggest an alternative in Cabot Benjamin Graham Value Investor, which last week sent this message to its readers:
"Valeant Pharmaceutical (VRX) reached its Minimum Sell Price of 194.79 today. The company reported strong fourth-quarter financial results. Sales rose 10% and EPS surged 20%, after increasing 33% and 48% in the prior quarter. Valeant also announced that it will acquire Salix Pharmaceuticals (SLXP) for $14.5 billion.
"VRX stock price is now overvalued at 23.0 times current EPS, which is higher than its 10-year average P/E of 12.6. Earnings are expected grow at a 20% pace during the next five years, but Valeant does not pay a dividend.
"Valeant was first recommended in April 2012 at 53.05. VRX has soared 266.9% during the past 34 months compared to a gain of just 54.0% for the Standard & Poor's 500 Index during the same time period. I recommend selling your VRX shares now."
Ace value investor Roy Ward sends such messages to his readers frequently, and if that sounds like a message you'd like to get in the future, I suggest you take a closer look! Click here for details.
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Moving on to the market, February was a crackerjack month for stocks, as the go-nowhere volatility of the preceding months morphed into a rocket-shot that rewarded the vast majority of stocks.
To some extent, the growing ebullience of investors makes me nervous; I know that the happier and greedier investors get, the closer we are to the ultimate top of this cycle.
On the other hand, this growing bullishness makes me happy, because it results in a very trendy market, and I love trends. And while it's natural to be concerned that prices are now "too high," as a number of readers commented in my survey, it's equally true that trends last longer, and go further, than people expect.
So to find today's featured stock, I scanned my watch list and selected the trendiest stock I could find.
Palo Alto Networks (PANW)
One of the biggest threats to every business that uses the Internet is network security. Sony, Target, Home Depot and JP Morgan all discovered too late that they were vulnerable, and now every sizeable organization on the planet is working overtime to ensure that their networks aren't similarly compromised.
Which means good times for Palo Alto Networks, one of the premier network security providers in the world.
Palo Alto's security platform brings all security functions together, including advanced threat protection, firewall, IDS/IPS and URL filtering. It has roughly 21,000 customers in over 120 countries, including more than 75 of the Fortune 100, and business is booming!
In 2014, the company grew revenues 51% to $598 million. Earnings grew 38%, from $0.24 per share to $0.33. That's great growth, but the future promises to be even better. In 2015, earnings are expected to zoom 124%, to $0.74 per share-and then grow another 97% in 2016!
That's the beauty of the software business (as Microsoft learned long ago). Once the code is done, and you get companies paying regular fees, the profits pile up fast!
And the growing recognition of this money-making machine has kept investors piling into the stock over the past year.
Well, technically, it's nine months.
PANW came public in July 2012 at 42 and hit 73 a month later, but then the sellers took over, and for a long 14 months, the stock lagged the market, eventually putting in a double bottom at 40.
And then the buyers took charge! From the October 2013 bottom, the stock doubled to 80, then pulled back to 60, and since then it's been on fire!
Now, many of my readers-the ones who commented that some of my revolutionary stocks were "too high"-will no doubt reach the same conclusion about PANW. And that's okay. It's such differences of opinion that make a market.
But experience has taught me that when the market gets into high gear, as it is now, you don't make money by betting on laggards; you make money by betting on leaders!
Yes, at some point, PANW will come under the control of sellers again; no tree grows to the sky. But there's no telling when that will be. So the way to play it, if you can stand the excitement, is to manage your risk. Start slowly, ideally buying on dips. Use stops just under natural support levels. And average up as your profits grow.
Even better, become a regular reader of Mike Cintolo's advice in Cabot Market Letter, so you know when to eventually get out of the stock.
Mike's readers bought PANW at 104 last November (if they followed his advice) and they get an update from Mike very week advising them what to do next, with PANW and every other stock in Mike's growth-oriented portfolio.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory