Stock Market Video
Using Every Resource in Growth Investing
This Week’s Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, Mike Cintolo details the market's recent selloff—the second time this year that the market has been unable to break free of the choppy and challenging environment. Because of some abnormal selling in certain key groups, Mike advises taking a step or two closer to shore, but maintains that it's a stock picker's market—some sectors, like chips, financials and certain biotechs appear to be under distribution, but many other growth stocks have barely budged. He shares lots of potential buys (and sells) in this week's crucial presentation.
Using Every Resource in Growth Investing
I read a book once that offered to tell me all about the mistakes (or at least “The 6 Basic Mistakes”) we all make in thinking. I paid my $19.98, brought the book to work, and started reading, with every expectation that I was going to learn how to avoid those basic mistakes and become a much smarter and savvier thinker.
When I finished the book, I realized that I would have been smarter and savvier if I had spent the money I paid for the book on a movie and popcorn. That’s mostly because it takes more than reading a clever book to alter how someone thinks.
That puts me in mind of a joke that Mike Cintolo told me the other day. It goes like this:
When you’re dead, you’re dead and you don’t know it, so it’s more of a problem for other people. [pause] It’s the same if you’re stupid. [laughter, applause] I’m not saying that it’s not a good idea to try to get smarter. But I’m of the opinion that people who don’t think straight are unlikely to get their thinking straightened out by a book, even if you could force them to read it.
But there was one particular section of this book that really got my goat, because the author wound up ridiculing technical stock analysis. And he made fun of it in a particularly wrong-headed way. Here’s part of what he said:
“Technical analysts (also called chartists) believe they can see patterns in stock price charts that allow them to predict whether a stock will increase or decrease in the future. A chartist doesn’t even care what type of business a firm is in—they could be selling computers or Barbie dolls.”
I suppose there must be dedicated, tunnel-vision chartists out there who make investment decision based on chart patterns alone, just as there are people who think that knowing which sign of the zodiac someone’s birthday falls under gives them real insight into that person’s character.
When I came to work at Cabot, a large part of my first year was spent studying chart patterns. But I spent just as much time studying everything about the businesses whose stocks we were investigating. Nothing is irrelevant to a growth analyst who really wants to make money.
It’s my belief that anyone who makes an investment decision based solely on any single factor—chart patterns, earnings trends, great stories, a CEO’s history or a recommendation from a talking head on cable TV—is probably going to lose money. And deserves to.
Personally, I like to use what I call the SNaC approach. That stands for Story, Numbers and Chart, and it means that—for me, at least—getting confident enough to actually buy a stock requires all three factors to be pointing in the same direction.
Story: What does my candidate company make or what service does it deliver? How many competitors are there, and how much intellectual capital does my company bring to the battle? Is the company a technology leader? Does it have a strategy for getting more profitable? There can be lots more questions, but you get the idea.
Numbers: This is the realm of the fundamentalist analyst. They research revenue and earnings trends, margins, ratios of a stock’s price to the company’s earnings (or some other factor), free cash flow—basically anything in a company’s operations that can be reduced to a number. They use their results to calculate a company’s fair value and project its future earnings, which gives them insight into both its strength and its cheapness.
Chart: This is where the technicians hang their hats. Chart readers look for trends, including common patterns like cup-with-handle, double tops and bottoms, base-building and breakouts and support and resistance. And while I’m always amused by the heavily marked-up charts produced by some technicians—they look like a hail of Imperial Storm Troopers’ laser blasts—I also believe strongly in the value of charts.
But then, I also believe strongly in the value of story and numbers. And I’ve never understood why anyone would willingly ignore any potential source of insight into the prospects, performance and probabilities of a candidate stock.
Cabot’s growth advisories—Cabot Market Letter, Cabot Top Ten Trader and Cabot China & Emerging Markets Report—are all based on the idea that the more you know, the better your chances of accurately discerning potential market leaders and finding the big winners that will fuel your returns for the year. And if you add the power of our award-winning market timing indicators and our decades of experience, these advisories are great allies in your quest for a profitable portfolio. You can put us on your side by clicking here.
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Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies and Contrary Opinion buttons by clicking here.
Tim’s Comment: One of the most common mistakes we see beginning investors make is holding losers, usually “because the story is so good!” But Soros knows better. He knows that the market always speaks the truth, so when the market tells him he’s wrong, he listens.
Paul’s Comment: There may also be a little false modesty here on George’s part. I imagine that his batting average is pretty high. But I’m sure he’s telling the absolute truth when he says that he accepts the verdict of the market and gets busy on his next investment. The first and greatest commandment of the market is, “Thou Shalt Not Hold Losers!”
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.
Tim Lutts, the brains behind Cabot Stock of the Month, writes in this issue about the results of his survey of your (our readers’) attitudes toward the market, investing and the future. He also looks at how Roy Ward selects value stocks for Cabot Benjamin Graham Value Report. Stocks discussed: United Therapeutics (UTHR) and Michael Kors (KORS).
Mike Cintolo, Chief Analyst of Cabot Market Letter, writes about how to tell when a stock (or sector) has put in a bottom and is ready to start a new uptrend. Stocks discussed: S&P Exploration ETF (XOP), PDC Energy (PDCE) and Diamondback Energy (FANG).
I use this issue to look at the remarkable (and remarkably long) bull run that markets have been in since late 2012. It’s useful to keep this in mind, because a market uptrend is a terrible thing to waste. Yes, conditions are choppy right now, but the major trend is still up, and you should have money at work in the market. Stock discussed: United Therapeutics (UTHR).
Chief Analyst, Cabot China & Emerging Markets Report
And Cabot Wealth Advisory