Stock Market Video
The Trouble with Picking a "Stock of the Year"
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In this week’s Stock Market Video, our growth expert Mike Cintolo says that while he hasn't yet become more bullish, he's now seeing many encouraging indications from the market and growth stocks. His real key is to have a plan no matter what comes, and he's filling up his watch list with new leadership should the market break up and out of its trading range and shares many of his top picks.
The Trouble with Picking a “Stock of the Year”
Writing about stocks is always interesting. And giving advice about buying and selling stocks is interesting and daunting. While I don’t know how many people actually follow every one of my recommendations, I feel a huge responsibility every time I tell my subscribers to hit the “BUY” or “SELL” buttons.
Accordingly, I want to make sure that my advice is sound and that I’m taking into account all the available information on the company and its products and prospects, what markets are doing, the portfolio’s exposures and cash position and the momentum reflected in the stock’s chart.
I can do that. I’ve been doing it for over a decade with good success.
But, every year, as October and November roll around, Cabot’s analysts start to get requests from all over for their picks for the next year’s “Stock of the Year.”
And that’s a whole different kettle of fish.
The problem is that I’m supposed to predict what a stock will be doing in a month or two (when the new year starts) and then how it will perform for an entire year. And someone will be keeping score.
And that’s not what I do at all. My approach is about timeliness, including the current strength of both the stock I’m considering and the market I’m investing in. So the contest is rigged in favor of fundamentalists and value investors who make their living by crunching numbers to find long-term value.
I’ve been thinking about this problem because I just ran across a file on my computer desktop called “BABA STOCK OF THE YEAR,” in which I explained why I thought Alibaba, the Chinese ecommerce giant, would do well in 2015. Here’s what I wrote:
“Alibaba (BABA) is my stock of the year partly because of the company’s position in China and partly because of its potential for expansion outside China. Alibaba’s ecommerce sites—Taobao Marketplace, Tmall and Juhusuan are the main ones—connect buyers with sellers, consumers with other consumers and companies with companies. The company owns an 80% share of China’s online shopping market, which will only grow bigger as smartphones give more consumers online access. Alibaba’s enormous IPO in September raised over $25 billion, the biggest ever. And with the money raised, Alibaba will have a mammoth fund for acquisitions and development that founder Jack Ma (an English teacher who founded the business as a way for customers outside China to connect with Chinese suppliers) can use to reinforce his operation in China or to bring Alibaba-style commerce to the rest of the world.
“Alibaba now has a market cap of over $271 billion, and enjoyed 56% revenue growth in 2014. Sales in 2014 have increased by 39%, 45% and 53%, respectively, during the first three quarters. Earnings are forecast to grow 20% in 2015 and 38% in 2016, but that doesn’t take into account the businesses the company might buy or other businesses it might move into. Alibaba is the biggest China story around.”
And here’s a chart that shows how BABA has done year-to-date.
It’s not a disaster, but it’s certainly no triumph. The best I can say is that BABA has made some progress in its bottoming process. And it made a nice move in May that led to quite a few questions from subscribers asking whether it was time to buy.
Unfortunately, I think the answer is still no. I think there is still a ton of BABA that was bought at higher prices during the IPO and post-IPO uproar that will keep overhead pressure on the stock. And I think investors have other choices in the Chinese ecommerce derby that are performing better. (I’m thinking of JD.com, for instance.)
It’s probably not timely to be writing about stock-of-the-year choices in the middle of the year. But I think there’s a good lesson for growth investors here. And that is that long-range prognostication of stocks that use shorter-term investing strategies is a flawed enterprise. Keeping your eye on what’s happening to your stocks and the market right now is the proper strategy.
I will continue to watch BABA, and I’m fairly confident that it will show up in the portfolio of Cabot China & Emerging Markets Report again, someday. But I certainly won’t be trying to figure that out a year in advance.
“Of all the famous last words in the annals of business, undoubtedly the most famous are these: ‘He couldn’t make up his mind.'" -- Harry A. BullisTim's Comment: I have no idea whether or not Harry, one-time President of General Mills, was a good investor, but I do know that decisiveness, based on a firm understanding of principles and rules, is critical for successful investors.
Paul's Comment: Growth investors need to have a bias toward taking action, whether it’s buying good stocks at good entry points or selling stocks that aren’t working. You can’t buy a stock yesterday, and you can’t sell it tomorrow. It’s always right now in the stock market, and that’s when you need to be able to make your decisions.
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, Chief Analyst of Cabot Stock of the Month, continues the story of his long cross-country driving trip, this time with an emphasis on the art he saw along the way. Stock recommended: Dunkin’ Brands (DNKN).
Nancy Zambell, editor of Investment Digest and Dividend Digest, looks at why companies might split their stocks 1-for-2, for instance, rather than 2-for-1. She also looks at some companies that have done reverse splits and prospered.
In this issue, I look Vipshop Holdings (VIPS) to address the problem of how to handle stocks that have delivered big returns in the past, but have slowed down or rolled over in recent weeks. Stocks discussed: Cheetah Mobile (CMCM).