The Social Media Investor
High Potential Sectors
One Strong Stock
Last week's Wall Street Journal had a story on the growing use of social media among investors. They use it for research, they use it for sharing ideas, and they use it for gauging who is worth paying attention to-and who isn't.
And who do they think is worth paying attention to? The people with the most followers, of course!
Now, this is not surprising.
As humans, we've evolved to feel good about following leaders, following people who are popular, and, in general, joining crowds.
Crowds make us feel safe. Crowds make us feel correct. And when we follow the crowd, we don't need to do the hard work that original thinking requires.
Thus it's only natural that Twitter is now awash with self-styled investment experts boasting thousands of followers-experts whose number one qualification for being followed is their ability to attract followers.
It's circular reasoning, I know.
But it does raise at least two important questions.
One, are these Twitter experts any good?
And two, with the Nasdaq recently approaching its all-time high north of 5,000, is the enthusiasm of their followers a sign of a market top or bubble of some sort?
The first question is easy to answer. Some of these Twitter experts are good and some are not. Seven-plus years into a bull market, it's not surprising that a number of independent investors have grown both their portfolios and their confidence. But short-term success, based, for example, on their ability to catch the rebound in oil stocks or their concentration in one hot biotech stock, isn't much use as a guide to their long-term abilities. The true value of their capabilities will be revealed by how they-and their followers-do in the next bear market.
Which brings us to the second-and far more important-question.
Are the growing numbers of investors relying on social media for their market intelligence in any way a sign of growing risk in the market, particularly because they appear to parallel the rise of "chat room" day-traders prior to the big 2000 dot-com market peak?
My answer is no, for these reasons.
First, the very fact that the question is being asked is healthy, and a sign that there's still skepticism enough to dampen "irrational enthusiasm." Back in 2000, very few investors were even asking the question!
Back then, the dominant factor in the market was the belief that the Internet would change everything, making virtually every industry on earth more productive, and that progress was coming so fast that any real bear market was still far in the future.
(Well, the Internet did change everything, but the market had already priced it in. The market looks ahead.)
Back then, the mania was so strong that both the Dow and the Nasdaq climbed higher all the way through 1999, even though interest rates were rising the whole time! At the same time, however, the Advance-Decline Lines were declining, creating a divergence that warned of a fragmenting market.
Today, if Janet Yellen even whispers the words "rate hike," the Dow drops 200 points. And the market today is not fragmented at all! Today, now that the energy stocks have recovered, the Advance-Decline line is hitting new highs, in synch with the indexes-altogether a very healthy situation.
And, of course, interest rates are not rising today. And I think they're unlikely to rise much in the future.
I recognize that the Twitter traders and dot-com traders have parallels. Both are entirely reflective of the growing interest in short-term trading that typically develops in smaller, less-experienced investors in the latter stages of a bull market.
But it's worth remembering that the market always does its best to fool the majority, so while many are looking for a bubble in echoes of the past (increased day-trading and rising interest rates), the eventual end of this bull market will likely come from some other fundamental factors, factors fewer people are paying attention to.
Still, as the eventual end of the bull market nears, it's likely that we will get clues, once again, from the behavior of stock charts. And that's something you can count on me to keep you informed about.
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Which brings me to today's stock.
It's common in the latter stages of a bull market for investors' focus to narrow on an increasingly small number of sectors and stocks. In 1999, of course, Internet stocks led the pack.
So one intelligent question to ask is what sector(s) might lead the latter stages of the current bull market.
For my money, two sectors have the edge today.
The first is the solar energy sector, where a revolution is slowly taking place, not least because their associated yieldcos, which I wrote about here last week, provide an exciting new source of dividends to investors-while providing cheap capital to the industry.
The second is the broad medical field, where great progress continues to be made thanks to technology, and where Obamacare has led to increased use of health care services.
Both of these sectors have been strong this year-so strong that many investors view them as overheated. But I'm a strong believer that trends, once in effect, tend to last longer and go further than most people expect, so I think there's more upside ahead.
And one fairly low-risk way to participate in it is Illumina, a stock I've liked for years.
Illumina, headquartered in San Diego, California, is the world's number one manufacturer of machines that enable genetic analysis, mainly gene sequencers, scanners and arrays.
Its customers include genomic research centers, academic institutions, government laboratories, hospitals and a variety of commercial pharmaceutical, biotechnology, agrigenomics and consumer genomics companies.
Revenues are now $2 billion, with 51% of that coming from the U.S., 25% from Europe, 18% from Asia-Pacific and the rest from elsewhere.
And here's a cool thing about the company: Consumables. The disposable components that are used for each analysis accounted for 56% of revenues last year, and that percentage is almost certain to grow larger, providing a steady stream of high-margin income.
So from a business point of view, the future is fairly solid here.
In the latest quarter, reported just last week, Illumina saw revenues grow 28% from the year before to $539 million, while earnings soared 72%, to $0.91 per share, beating analysts' estimates of $0.72.
But part of that was related to one-time and tax factors, so while trading was heavy after the report, the stock didn't soar. In fact, it kept on trading in the range that's held it captive for the past six months.
And that's a good thing, if you're looking for a low-risk entry point in a stock with great long-term potential.
In fact, I think ILMN is almost certain to eventually break out above its January-February high of 203 and begin a new advance.
So, you could simply jump in and buy the stock here; it's trading just a few points above its 200-week moving average.
But even better would be to become a regular reader of Cabot Top Ten Trader, where every Monday, Cabot growth investing expert Mike Cintolo presents the market's 10 strongest stocks of the previous week. Mike has recommended ILMN before, and if the stock gets going, you can be sure he'll recommend it again.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory