There is intelligence and then there is wisdom. We are all born
with intelligence, but we pick up wisdom along the way. I'm no more
intelligent than when I got into this business 20 years ago, but
hopefully, much wiser. The key evolution: I now develop far fewer
mistaken assumptions about the stocks and industries I analyze.
With this in mind, here are five things I learned in 2011 that will
(presumably) make me wiser in the years to come...
1. Industry selection is far more important than stock
I spent too much time this year focusing on the best play in a
particular industry. For example,
was the best airline stock to own for the coming year.
Yet the whole group really moves in tandem, and it would have been
far wiser to suggest the right entry point for the group, and not
the stock. Indeed
Airlineindex (XAL) have traded in virtual lockstep since that late
would run into financial distress highlights the value of assessing
company-specific drivers -- especially on the short-side. But most
of the time, there's more value in a top-down
on the right industry than the bottom-up call on the right
2. Shun negativecash flow stocks when the economic
environment remains uncertain
Throughout 2011, I recommended a few development-stage biotech
Threshold Pharma (Nasdaq:
BioSante Pharmaceuticals (Nasdaq:
. Each of these companies is in the process of testing novel new
therapies and could -- one day -- be home-run picks. But these are
the wrong kind of businesses for weak economies. These biotechs
need serial capital injections to fund their clinical trials and,
because they waited too long to raise fresh capital, their
have gotten crushed. The outlook for 2012 is probably no better, so
expect few new biotech ideas from me.
3. If some think there is a looming glut in a given
industry, then they're probably right
Early in 2011, a small chorus of voices suggested the solar-power
industry and the natural-gas producers were engaged in a battle to
ramp up output that would wreak havoc. They were right, and as a
result, prices for solar panels and natural gas fell and fell some
more. In the solar space, a few companies are now flirting with
bankruptcy. In the natural-gas industry, few near-term drivers
exist to brighten the industry outlook. When the shakeout comes and
supply finally falls to the level of demand, these will be
appealing industries, but they're surely dead money until then.
Supply and demand will always be the key factor driving profits in
any industry, and I let this concept get away from me when looking
at company-specific dynamics in these energy subsectors.
4. The next quarter
In years past, investors tended to focus on the year ahead and
would buy stocks that would likely post solid results down the
road. This is not the case anymore. These days, investors will
punish a stock if the current quarter is weak, no matter how good
the longer-term view may be.
In September,I took a bullish view of
Micron Technology (Nasdaq:
, noting the
stock was very cheap
at less than 75% of tangible
. I noted shares had recently been weak "due to a slowdown in
demand for DRAM [or dynamic random access memory], which caused a
glut of chips. The good news is pricing is likely to improve later
Later this year?
I failed to acknowledge the reality that Micron still had another
bad quarter ahead of it. The chart below shows how that played out.
You could have actually bought this stock for less than $5 if you
waited for the fourth quarter to roll in. Everyone knew it was
coming, but I mistakenly assumed investors would look beyond that
5. Valuations matter
This is a lesson I absorbed years ago, but it's worth repeating for
those investors who made this same mistake in 2011. If a stock has
a really rich valuation, then you shouldn't own it. The risk is far
greater than the reward at a time when so many other stocks sport
very low valuations. For every
Chipotle Mexican Grill (NYSE:
, for example, which manages to stay aloft at 60 times trailing
, you also may find a
, which ended up falling 77%, 69% and 56%, respectively from their
52-week highs as lofty growth expectations couldn't be met.
I'd much rather own a stock like SodaStream once it's no longer
being chased by momentum investors. [You can read my take on
whether I think that's happened or not
in this article
Action to Take-->
How will these lessons affect my outlook for 2012? Well, expect a
continued focus on inexpensively-valued stocks and an ongoing
search for potential short candidates that may be imperiled by a
. The short- to mid-term outlook calls for pivoting between buying
opportunities when the
slumps badly and profit-taking whenever the market is in the midst
of an extended upward move. A similar approach may be the wise
route for you next year as well.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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