Low Priced Stocks: Lots of Risk …
… but Lots of Potential at Year-End
A New Leading Stock to Take for a Drive
Low-priced stocks are like catnip for many investors. Novices love them most of all, but sometimes seasoned investors and even professionals fall for the siren song of “cheap” stocks.
The idea of finding some little-known company with a revolutionary product or device before everyone else does, buying a ton of shares while the stock is three or four bucks and then watching as it skyrockets tenfold is a dream that attracts a wide swath of investors.
Unfortunately, in most cases, it’s just that—a dream. The vast majority of low-priced stocks are low-priced for a reason; the companies are generally not successful, have little going for them, and, importantly, have little or no institutional sponsorship. In fact, because these sub-$10 stocks tend to trade with little volume, most big investors stay away from them, which can lead to choppy, trendless trading.
In my growth stock methodology, I rarely dive into low-priced stocks. The odds are simply better with well-traded, well-sponsored stocks that are showing serious sales and earnings growth.
Simply put, the companies that are changing the way we work, live and party—i.e., most of the big stock market winners of the past few decades—rarely come off their launching pads below $10 per share. So I rarely look there.
When I screen for stocks, I usually filter out those priced below $10—I want to buy (and hold for months or years) stocks that Fidelity, T. Rowe Price and other institutions are accumulating. And it’s rare for these behemoths to do that in $4 or $5 stocks.
At this point, you’re probably thinking, “OK Mike, I get it—you don’t like low-priced stocks.” However, one thing that attracted me to the stock market decades ago was that there is a time and place for everything.
And, as it turns out, there is a time when low-priced stocks are the place to be. That time is generally the last couple of weeks of the year through the first few weeks of the new year.
Why is mid-December to late-January such a good time for low-priced stocks? There are two main reasons.
First, you have the bounce effect, where tax-loss selling, usually in early December, serves to depress many of the stocks and sectors that have had bad years. Once this selling subsides around the holidays, many of these stocks bounce nicely for a few weeks, especially if any positive news gets out.
The second reason is much simpler. Nearly every year, the change of the calendar brings a renewed sense of optimism from mid-December to late January—as well as some powerful moves among more speculative, lower-priced stocks.
This is why, despite my usual avoidance of low-priced stocks, I spearhead Cabot’s Low-Priced Stock Report, in which I recommend 10 stocks that are generally priced in the single digits (though I’ve found one for this year’s report near 13 that I might include).
In the report, I explain each company’s story and why we like it, and give a buy range, advice on loss limits and partial profit targets.
I’ve been writing the report since 2003, and every year, the vast majority of the stocks will pop 10% to 20% within a few weeks (two to eight weeks is the sweet spot of performance), and usually we’ll have one or two stocks power ahead for a few months or more. The goal with these stocks isn’t to buy and hold—it’s really to capture short-term gains. But if you catch a tiger by the tail, you can take partial profits after the quick pop and trail a mental stop higher from there.
If you want to learn more about Cabot’s Low-Priced Stocks for 2016, click here. The once-a-year report will be emailed to you on December 17, and you can email me at any time with questions about any of the stocks. I hope you’ll jump on this opportunity!
Back to my main growth and market timing methodologies, we’ve seen a lot of ups and downs during the past few weeks, but the big picture has not changed much—the major indexes are still trending up, but the advance is very narrow, and rotation among sectors and stocks has been vicious (about 58% of all stocks on the NYSE and Nasdaq are still below their long-term 200-day moving averages!).
In other words, some stuff is working, but you have to be selective and pick your buy points carefully.
If you’ve read my thoughts in Cabot Growth Investor or Cabot Top Ten Trader or on Twitter (handle @MikeCintolo), you know I’m a big fan of the liquid leaders. Having most of your portfolio in names like Amazon, Facebook, Google, LinkedIn and similar big, liquid stocks can not only give you lots of upside, but also (because of their great sponsorship and dominant positions in their industries) limit your downside (as long as the market remains in good shape).
And some smaller, faster-moving stocks are also doing well in this selective environment. One of my favorite stories in the mid-cap space is Fleetmatics (FLTX)—it’s on my watch list in Cabot Growth Investor, and it also appeared in Cabot Top Ten Trader two weeks ago:
“Now here’s an easy-to-understand story with lots of potential. Fleetmatics is a leader in cloud-based software that aids with corporate fleet management, helping companies better manage fuel costs, vehicle wear and tear, and even wasteful idling, while also keeping an eye on unproductive worker behavior, unsafe driving, unauthorized vehicle use and excessive overtime. Simply put, Fleetmatics saves companies lots of money by cutting down on waste and increasing productivity; one example showed that a customer’s $640 investment ($40 per month, per vehicle) saved $4,200 per month! Plus, the company also offers field service management, improving communications, scheduling, and invoices. The fleet management and field service businesses are in their infancy; both have penetrated just 12% to 17% of the North American market (where 90% of its business comes from), so there’s years worth of growth potential left. Another big thing to like is the company’s subscription-only business model—like most cloud companies, clients sign up for initial terms (usually three years), pay monthly and renew at extremely high rates. Fleetmatics has about 90% of its revenues booked each quarter before the quarter even begins! There is some competition, but Fleetmatics is a leader, with 655,000 subscriptions at the end of Q3 producing consistent and fast growth in recent quarters. It’s a great story.”
FLTX consolidated nicely over the past three weeks, and remains in a firm uptrend. If you want my latest advice on FLTX and, more importantly, if you want to discover the stocks where the big money is flowing, I urge you to try out Cabot Top Ten Trader—our system never misses out on the market’s leaders because we specifically look for strength (and then identify lower-risk entry points and loss limits for subscribers).
I hope you’ll join us, especially if the market’s rally accelerates!