4 Stock-Picking Tips You Can Use to Find Big Winners
One Great Drug Stock
One of the goals of everything we do here at Cabot is to make
you a better investor. Sure, it's easy to simply recommend specific
stocks. But doing that is like giving you a fish, when we really
want to teach you how to catch your own fish.
So today I want to focus on a few of the "tricks" I use to find
really big stocks, and specifically, how they applied to the
Tesla Motors (
, which has been a winner for my Cabot Stock of the Month
subscribers and which I still think has enormous growth
(Note: I'm well aware that I've written about Tesla a couple
times already in the past few months, and if you're getting tired
of it, I apologize. The fact is, my latest comments (last Tuesday)
brought some responses that are included below, and that are
relevant to this discussion.)
For example, one reader forwarded this, found on the
"If you leave a Tesla parked for too long, its background
systems-which are permanently running-can drain the battery all the
way down, at which point the car is effectively useless unless you
purchase a new battery from Tesla for about $40,000 … on a fully
charged battery, a Tesla can last about 11 weeks without a
recharge, after which it will become completely useless."
This is true, or at least it was when I first read this post
over a year ago. But that fact alone doesn't necessarily mean the
company won't sell cars and make profits!
In fact, Tesla works very hard to ensure that their car's
batteries don't get drained to zero, with numerous warnings when
the charge gets low. Owners can even request that their vehicle
alert Tesla if the battery charge falls to a low level.
And if you use your imagination, you can certainly envision what
people might say if a company like
were introducing the first gasoline-powered car in a world that had
previously relied on electrics. Critics would warn, "It's a rolling
bomb. One crash and all that gasoline will ignite and burn up the
driver and all the passengers!"
Somehow, we all live with this risk. Conclusion: the fact that
the battery in a Tesla can be drained to zero is not a major
Another Internet post, sent by a reader, notes that Tesla "sold
more than 4,750 cars in the first quarter … There is no economy of
scale at that level, which is what eventually will doom the company
… global electric car sales have faltered, buried by clean diesel,
falling gas prices and a clear preference among buyers of hybrids
for the Toyota Prius, and much higher end equivalents, such as the
Porsche Panamera S Hybrid. The Porsche sells for $96,000 or better
and is, by many measures, a better sports car than Tesla
The first part of this post ignores the fact that the company is
growing production rates. What kind of analysis is that?
The second part is just plain wrong, as sales of all
alternative-power vehicles continue to grow. The chart below,
admittedly, looks more than two years into the future, and is
almost certainly imprecise about that. But the trend is clear.
And the third part of the post ignores the fact that the Tesla
Model S was named "2013 Car of the Year" by both Motor Trend and
Automobile Magazine. I'd say that's a whopping omission.
So, Tip Number One is to LOOK AT THE BIG PICTURE.
When you read bad news, ask yourself if there's another side of the
story. And when you read good news, do the same. Even before the
Internet became so influential, there were media that presented
only one side of the story, most commonly because they had a vested
interest. Now, with the Internet allowing almost anybody to express
an opinion, the situation is worse. But that doesn't mean your
investment results have to suffer.
If you have half a brain, you'll ask yourself whether the author
has an axe to grind. Is he a short-seller trying to profit by
pushing the stock down? Does he work for a competitor? You can't
know, of course, but you can work hard to get the entire picture,
and in that pursuit, the Internet can be a big help.
Tip Number Two is to USE YOUR IMAGINATION.
This is difficult for many people, who are better are seeing risks
than opportunities, but it's especially difficult for people who
have been trained as stock analysts, and who focus heavily on
numbers. Imagination involves seeing what lies far beyond today's
numbers, and it's a vital skill in finding big winners.
But anyone relying on numbers would have had trouble buying
Tesla until now, as it was just three weeks ago that management
announced that it expected to announce its very first profitable
quarter when it released this year's first quarter results.
Similarly, anyone who waited for
to turn a profit would have missed a huge part of that stock's
advance. When Jeff Bezos first rolled out the service, most
"experts" predicted that Barnes & Noble and Borders would kill
it. Well, we bought AMZN in January 1998 and locked in profits of
over 1290% when we sold in January 2000. That was more than two
years before Amazon.com posted a profit!
And look which book company is dead now!
When thinking about Tesla, a lot of people have trouble seeing
beyond the next quarter or two. Even if they can get beyond the
story of the dead batteries, they still have trouble looking beyond
the fact that the company only makes expensive cars; they can't
imagine the company making sensible battery-powered cars for the
mass market-even though CEO Elon Musk has said that's one of his
They can't imagine a world where fewer and fewer people use gas
stations; after all, that's the world we've all grown up in.
And they can't imagine a world where you order a car and it's
built precisely to your specifications and you pay the exact list
price, no more and no less.
But you've got to try to stretch your brain to see the best
For example, when
debuted its DVD by mail service in 1999, skeptics found it hard to
believe the company could make money. They found it hard to believe
that people would give up on their local video stores. But history
has proven those skeptics dead wrong.
Tip Number Three is to TRUST THE CHART.
If you look back at Amazon's chart, you'll see that it was rising
rapidly when we bought it. That told us some big investors were
buying the stock, despite the naysayers, and by following that
money, we were able to make big money too. If you look at Tesla's
chart since its IPO, its main trend is clear, too; this stock is
going up. Big investors are getting on board here, too, as
skepticism slowly gives way to cautious optimism.
Tip Number Four is to CONSIDER THE VALUE OF TOP
Jack Welch, Larry Ellison, Bill Gates, Jeff Bezos and Steve Jobs
all became renowned for their managerial capabilities, from their
ability to visualize the future to their abilities to inspire their
followers. In the case of Tesla, many have compared founder and CEO
Elon Musk to Steve Jobs-in part because both Apple's and Tesla's
products are beautifully designed and in part because
so recently was an excellent stock.
It's not a bad comparison, but it does fall short in one
important aspect. Steve Jobs was a master showman, famed for his
"reality distortion field," which could make others see the world
as he did. Elon Musk, by contrast, is not good at PR; he takes
umbrage easily at slights that Jobs would have shrugged off, and
his tweets in reaction to unfavorable comments have more than once
given the impression that his time would be better spent on
strategy and engineering than marketing.
But what Musk lacks in PR-savvy, he compensates for with
brilliant strategic thinking, and a willingness to tackle big,
world-changing projects. His successes already include PayPal,
which revolutionized online payments, and SpaceX, which
revolutionized space transport. Tesla is his biggest current
project, and his track record says he'll succeed here, too.
So there you go. Four "tricks" that can help you pick big
winners. Every one was useful is identifying Tesla as a potential
winner more than a year ago, and every one suggests that the stock
has vastly more upside potential.
But should you buy now?
Well, short-term, TSLA is clearly high; it's up 42% year-to-date
and up 27% since the end of March, thanks to the news that the
company would turn profitable in the first quarter of this year.
Buying here brings with it a lot of short-term risk.
Sticking with the theme of finding great high-potential stocks,
the practice of focusing on strong charts is one that will never
steer you wrong. In fact, I keep an ever-evolving list on my desk
of leading stocks, and one that keeps popping up is
Onyx Pharmaceuticals (ONXX)
Now, biology is my weak suit, so I won't claim to understand
exactly what makes Onyx such a great company. What I do know is
that it's targeting the cancer market, and that's huge.
Furthermore, I know that the company turned profitable way back in
2008 (though recent investments have put it temporarily in the red
again), so management is capable.
Onyx's biggest seller is its Nexavar tablet, which targets liver
cancer and advanced kidney cancer. Second are its Stivarga tablets,
which treat metastatic colorectal cancer. In clinical trials are
drugs to target liver, kidney, thyroid, breast, and non-small cell
lung cancers, gastro intestinal stromal tumors, multiple myelomas,
hematologic malignancies and more.
With a stock hitting new highs, a company capable of making a
profit, and a huge potential market, ONXX is attractive right here.
But earnings will be reported May 7, and volatility should be
expected, so I don't recommend just jumping on board right
Yours in pursuit of wisdom and wealth,
Cabot Stock of the Month