Stock Market Video
This Week’s Cookie
In Case You Missed It
In this week’s Stock Market Video, I talk about the market we have now, which is a common (or garden variety) bull market. It’s not a roaring bull, so you don’t want to do a cannonball into the deep end of the pool. But it’s a bull market, so you should be putting money to work in great growth stocks. I give some examples of stocks that are thriving on increased consumer and business spending and tech growth. Click below to watch the video.
One of my favorite mutual funds used to be an offering from a big Boston investment house that took the favorite picks of a large number of the company’s stock and bond fund managers and put them all into one fund.
Think of it! A large-cap managers’s favorite large-cap, a tech fund manager’s top technology pick, and so on. It seemed like a can’t-miss proposition.
The trouble was, the fund consistently underperformed both the broad market and the funds run by the various managers. It seemed that the manager’s success with their funds was more due to their portfolio construction and risk management than to their stock picking.
But performance wasn’t why I liked the fund. What I loved was its nickname it had within the company, which was “The Cocktail Party Fund.”
It was called that because it was made up of the various managers’ favorite stock stories, the ones that they would talk about if someone asked them about a stock at a party.
At Cabot, we like stocks with good stories, too. We’ve always said that anyone who’s going to invest in a stock should be able to give a summary of why they were buying. (It’s the equivalent of the elevator pitch, which requires you to say—in the minute or so it takes an elevator to zip from floor to floor—why a company ought to hire you.)
I still believe that. If you don’t have real clarity about what makes a stock a good place to risk your money, you shouldn’t buy. (And “some guy on television likes it” doesn’t qualify.) And that real clear reason is often a good story. But I want to talk just a bit about the danger or relying too heavily on story. Because a great story just isn’t enough; you also need solid fundamentals and a supportive chart.
As a China and emerging markets guy, I used to love China Medical (CMED). The company had a nice, stable sales base of medical diagnostic kits that were cheap, simple and easy to read, perfect for small clinics in rural China.
But the company also had a high-intensity focused ultrasound (HIFU) machine that could destroy tumors by heating them. No incisions were required and there was no pain. It seemed like a fabulous technology to me (and other investors as well), and we kept waiting for the HIFU machine to get a clinical trial in the U.S. or Europe that would unlock the Western market.
A small trial ultimately got underway at a medical center in Washington state, but there was never a definitive result. China Medical ultimately sold the HIFU technology to another company and was finally bought out by a larger competitor. Some stories just don’t have happy endings.
I still get questions about CMED from people who loved it and would gladly buy back in just to be able to tell the HIFU story … if the company still existed. It was a perfect cocktail party stock.
Pharmaceuticals and other health stocks are great sources of stories that may or may not bear fruit. (I once got a stock tip from my doctor (!) who had it from a drug salesman that a particular drug was going to push its company’s stock through the roof. Didn’t happen.)
MELA Sciences (MELA) is another great example. The company’s MelaFind optical detector was a sensation for a while, boasting great clinical results, identifying malignant melanomas on patients’ skin at a much higher rate than that achieved by dermatologists alone. The company was even mentioned in Cabot Wealth Advisory back when it was still known as Electro Optical Sciences. The stock got a great boost a month later, zipping from 7 to 11 in just a few weeks.
Eventually, the FDA asked the company to produce more details on its clinical trials and the stock nose-dived. Today, you can pick up all of the MELA you want at the bargain price of $1.80 per share. And that’s a big improvement over $1.20, which is where it was trading at the end of 2014.
The MelaFind story is powerful, especially because there’s an entire generation of sun-loving Baby Boomers poised to suffer the consequences of their blithe sun worship. Melanoma is a deadly cancer, and early detection is vital, which is exactly the MelaFind’s specialty.
But, as investors have been finding out for years, story isn’t enough.
Some investors, either because they will be lucky enough to buy at the right time, or because they were just too stubborn to sell, will probably make good money on MELA. Probably. (The approval by the FDA isn’t a cinch, after all.)
But a company with a record of real earnings growth and a chart that shows investors piling in and pushing the price up is still a better bet.
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Tim’s comment: One of the most common mistakes made by growth-oriented investors is refusing to cut losses. For a variety of psychological reasons, they become convinced that they are right and the market is wrong. Don’t do it. Listen to the stock and move on.
Paul’s comment: I have a lot of sympathy for investors who hold stocks long after their prices have fallen, handing huge losses to their portfolios; I’ve been one of them. Fortunately, as I always say, the market is quite willing to give lessons on the cost of ignoring sell rules. Unfortunately, it charges a very stiff tuition fee for the lesson. If you can learn from other people’s mistakes, you’re miles ahead.
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.
In this issue, Tim Lutts (the brains behind Cabot Stock of the Month) looks at which of his 10 Revolutionary Stocks his readers own, and why they do or don’t own them. Stocks discussed: Valeant Pharmaceuticals (VRX) and Palo Alto Networks (PANW).
I write in this issue about what happens when the market turn bullish and you want to start doing some buying: lots of issues arise, including stock selection and setting sell points. Stock discussed: Martin Marietta Materials (MLM).
Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, writes about safe, stable utility stocks and their steady income stream. She lists the utilities that have the lowest P/E ratios. Stocks discussed: Edison International (EIX), Public Service Enterprise Group (PEG), PPL Corp. (PPL), SJW Corp. (SJW) and New Jersey Resources Corp. (NJR).
Chief Analyst Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory