One of the most interesting parts of my job is answering questions from subscribers, mostly about growth investing. The questions I get tell me an enormous amount about how investors are thinking, what they’re worrying about and how they’re handling market conditions.
Here is a question I got last week, and the answer I sent back. (I’ve buffed up the answer a bit to make myself look like a better writer, of course. But it’s mostly just as I sent it.)
Here’s the email:
“I find it difficult to commit to any new buying now. The market is still trending down. These days don't seem to have any historical references. We are in uncharted waters in this regard. I know that this service is about stock picking. Yet, stocks don't occur outside of the market context. Bond rates are at historical lows, with a somewhat flat yield curve. Europe and Japan with their negative rates. All this is unprecedented. If you could only help in reconciling all these factors, I would be in such a state of appreciation. I'm fairly certain that these issues are on the mind of many other subscribers. Anyway, thank you.”
And here’s my answer:
It’s true that these are unsettled and unsettling times. The news is filled every day with stories about political chaos in the U.S. and abroad, wars, weakening economies, global warming, China’s aggressiveness, etc, etc. Analysts can’t agree whether we’re at the end of a six-year bull market or coming out of a secular bear market that dates back to the bursting of the Tech Bubble in 2000.
The future is not only unknown, it is unknowable. We can’t get any traction on how (or whether) the current problems in the world are going to be solved. That’s just the way it is.
The only comfort I can offer you is this. The one thing we can be certain about is what the stock markets are doing right now.
1) The intermediate-term trend of the market is up. We know that because the indexes we follow are all above their respective 25- and 50-day moving averages.
2) The underlying health of the market is good. The evidence for this is that the daily number of new 52-week lows on the New York Stock Exchange has dropped below 40 for four straight days (and 11 of the last 14).
3) The long-term trend of the market is still down, which is keeping us from moving back into the market in a big way. Three of the five indexes that make up the long-term Cabot Trends indicator are within striking distance of their 35-week averages, but we don’t try to anticipate how they will perform in the future. Given all those factors, our growth investing advisories—Cabot Growth Investor, Cabot Top Ten Trader and Cabot Emerging Markets Investor—are advising doing some selective buying, but are being very cautious about jumping in too quickly.
We are advising our subscribers to do some buying, but keep a large cash reserve on the sidelines. We want to see our stocks making money before we increase our exposure. We want to let the market to pull us back in, rather than dive in all at once.
That’s the best advice I can give you. In all the uncertainty, we stick with what we can know for certain, and that’s the current health and momentum of the markets. If we don’t lose sight of the current reality, we won’t go far wrong.
Chief Analyst, Cabot Emerging Markets Investor
Two Things Every Growth Investor Must Know
The only thing I want to add to my response to Mr. _______ is this: The crucial skill in growth investing is knowing how to sell unsuccessful picks to prevent big losses. If you can’t do that, you can’t stay in the game.
But the most profitable growth investing skill is getting in on a new bull market ahead of the crowd. Catching the new leaders of a fresh market rally can make a large portion of your portfolio’s return for the year.
Cabot’s market timing indicators make it easy to know when the bull takes charge. The medium- and long-term trends aren’t that difficult to read and interpret. Their simplicity is a major part of their usefulness.
But having the courage of your convictions and putting more money to work in a bull market that’s still wet behind the ears is a different thing entirely.
New bull markets don’t appear until the bear market has succeeded in squashing the optimism out of enough investors to make them give up and sell out. And after an experience like that, many investors just want to sit on the sidelines and lick their wounds for a while.
It’s the savvy growth investors who got out of the market before it knocked them flat who have the right attitude—and the cash—to get back in when the growth investing indicators turn.
One last thing: Tim Lutts, our fearless leader (and Chief Analyst of Cabot Stock of the Month) is a dedicated contrarian. And when he read Mr. ________’s letter he remarked that it’s exactly when the market has so many threats to worry about that it starts to rebound. The flood of negative news washes away all the investors who get too nervous, and leaves only those who have real conviction, and those people provide the floor for the market’s new advance.
Silver Wheaton (SLW)
My stock pick this time is a company I’ve loved for a long time, even though I’m not all that fond of the precious metal sector. Silver Wheaton (SLW) is a silver and gold streaming company with a built-in profitability factor.
Every week, I help Mike Cintolo write up the strongest stocks of the previous week for Cabot Top Ten Trader, Cabot’s weekly guide to the most successful stocks on U.S. exchanges. Here’s what I wrote about Silver Wheaton in yesterday’s issue.
Why the Strength
Silver Wheaton is a Canadian-based silver company that doesn’t mine an ounce of metal itself. The company makes upfront payments to miners for the right to purchase, at a low, xed price, some or all of their silver and gold production. The company has streaming agreements with 22 operating mines and seven development-stage mining projects, but has no ongoing capital or exploration costs. Historically, the company’s costs have been xed at about $4 per ounce for silver and $400 per ounce for gold, locking in a strong pro t margin and giving investors exposure to rising silver and gold prices. The company’s current agreements with miners give it attributable production of about 43.5 million ounces of silver and 230,000 ounces of gold. And estimates are that by 2019, attributable production will reach around 51 million ounces of silver and 325,000 ounces of gold. The company’s stakes are unhedged, but by buying rights to production at low prices, profit margins are large, well over 30% over the last four quarters and historically much higher when precious metal prices increase. Silver Wheaton has made 11 previous appearances in Top Ten, starting back in 2008, when spot silver was priced below $10. Silver is now just under $16 and has been on the rise since January. Silver Wheaton will report Q4 and full year results on Wednesday, March 16, after the close. The stock’s dividend has a 1.2% annual yield.
SLW has been in a downtrend since April 2011, when it was trading at 45. The stock traded below 10 on January 22, but has rebounded strongly as metal prices caught an updraft. SLW topped its 200-day moving average in February and has been riding its 25-day moving average for weeks. SLW has paused for a few days at around 17, and may trade quietly going into earnings on Wednesday. If you like the combination of rising metals prices, built-in margins and a small dividend, you can buy a little SLW anywhere under 17 and wait for the reaction to earnings. A stop at 15.5 will reduce risk.
A write-up in Top Ten includes daily and weekly charts, a suggested buy range and loss limit and a full summary of revenue and earnings growth. You can see why I think it’s the best growth investing guide to market leaders anywhere.
If you would like to receive more information on SLW and additional momentum stocks, consider taking a risk-free trial subscription to Cabot Top Ten Trader.
Chief Analyst, Cabot Emerging Markets Investor