Master One Method
Two Internet Stocks to Watch
I was able to get away for a few days to Michigan last week,
where my in-laws reside; as always, we had plenty of fun and kept
busy, with a BBQ, trips to the pool and generally way too much food
Also, despite weather that was humid and around 90 degrees every
day, I made it out to play 27 holes of golf (nine holes each time
to keep the heat at bay). Now, I am basically a beginner at the
game-I picked up my first golf club just three or four years ago,
and my playing during the last couple of years has been sporadic as
my family's bundle of joy has morphed into a full-fledged toddler
Even so, I like to think I've improved a good amount, mainly
through work at the driving range and sporadic trips to play nine
holes with my wife. Gone are the days where I top the ball on every
other swing and really have no idea how far or what direction most
balls will go. Don't get me wrong-I've got countless holes in
my game that I'm sure will take years to fix. But I'm good enough
to register a few bogeys each round and even nail the occasional
par. It's good fun.
However, as I think about what area of my game needs improvement, I
don't think of a specific club I don't hit well (2-iron, etc.), a
specific part of the course that causes me trouble (though I still
get the yips off the tee at times) or a common characteristic of my
swings (like a slice or hook). Instead, to me, getting better
revolves around one major theme: Consistency.
To me, it's not like I can't ever hit a straight drive, or chip the
ball well, or hit some solid approach shots. I do all of those
every time I play … but the problem is that I rarely do them on the
same hole! If you're a golfer, you know what I'm talking about-one
hole you unleash a beautiful drive and set yourself up to make the
green on the second shot, only to bury yourself in a bunker. The
next hole you slice your drive way into the rough but, man oh man,
your second shot is a beauty and rolls just short of the
Golf is very exacting in that, to get a par or even a bogey, you
generally have to do just about everything well-solid off the tee,
good second shot and, of course, chip and putt well. You can't do
one or two of them well and expect success, and you also can't fall
into the good drive/bad drive/good drive/bad drive trap and think
you'll have a good round. Like I said above, consistency is the
"Gee, Mike, that's great and all … but why did you just make me
read a few paragraphs about your middling golf game?!?"
Because it's the same with investing-I regularly talk with other
investors (including professionals) whose lack of consistency costs
them money. As with golf, it's not as if these people are totally
hopeless or that they can't make some money here and there. In
fact, I would say all of them do decently (otherwise, the market
would have wiped them out long ago and they wouldn't be calling me
in the first place).
But my experience is that most investors lack consistency in one or
two areas. Either they are inconsistent when it comes to market
environments-i.e., they do very well when the market is, say,
range-bound, buying low and selling high, but they have brutal
losing streaks when the market enters a strong trend. Or they are
inconsistent within their system; for instance, they'll cut most of
their losses short, but the few that they refuse to sell because
they love the story (or whatever the reason) end up falling through
the floor and damaging their portfolio.
Looking at the first problem, it's not so much the investor's
system as the investor's understanding of his system. What I mean
is that no system is perfect in all environments. None! If you're a
growth stock investor like me, you generally need a supportive
market uptrend to make big money. The worst environments are choppy
ones, similar to what we saw in most of 2011 and since April of
this year. Buying breakouts then led to a string of losses.
So what should you do when the market environment isn't in
agreement with your system? Don't play! Or at least, play more
lightly, taking smaller positions, booking profits quicker.
Instead, I see many investors plowing ahead with the same
strategy in all environments, which leads to overtrading and poor
results. The solution is relatively simple-establish a system that
tells you when the environment isn't going your way.
At Cabot, we do that mostly through our market timing indicators,
but you can also do it by watching your own equity curve. The goal
isn't to come up with some black-box method of identifying the
exact turning point of the market, but to have a backstop that
tells you to slow down. For instance, if you have three losing
trades in a row, your next trade might be two-thirds your normal
size; if that's a loss, the next might be half-sized; and if that
loses, you'll stop all new buying completely until you figure
things out. That's just an example but something to chew on.
As for the second problem (being undisciplined), all I can really
say is … don't be! Actually, one suggestion is to reward yourself
for the process and not the event-that is, don't allow your
self-worth to be determined by your day-to-day equity curve. If
you're hesitant to cut your loss because your last two trades were
losers, think of the process and not the money loss. The same goes
for selling a winner too early-it's fine to do, but it's better to
follow your plan.
The bottom line is that the big winners in the market are
consistent. You don't hear about some great investor who made big
returns one year by playing growth stocks, then switched to a value
system the next year, and then followed an overbought-oversold
strategy the next. Similarly, it's not likely that investor buys
strength one year, then sells winners quickly the next, and then
goes ahead and averages down in price in the third year.
Instead, while tweaks and improvements are always necessary, it's
better to stick with a set of rules and tools over time.
As for the current market, I have mixed emotions-on one hand, the
major indexes seem to be bottoming in recent weeks, with a couple
of sharp shakeouts since their major low in early June. And
more than a few stocks I'm following have used these volatile times
to etch constructive launching pads. Said another way, the
market needed some time to repair the damage from a terrible April
and May, and it looks like it's done just that.
However, to this point, most of the "action" has been in
defensive-type names, things like food and beverage, tobacco,
insurance, discount retail and big telecom stocks-big companies
that have steady businesses and dividends. That's all well and
good, but these stocks are not going to lead a major market
uptrend; most of these companies are growing sales and earnings
around 5%, if that. And, besides, defensive stocks aren't where big
money is made-growth stocks are, and few have made any sustained
moves of late.
Even so, it's important not to rule anything out-just because
growth stocks haven't kicked into gear yet doesn't mean they can't
or won't. In fact, I've been writing for a while that I believe
earnings season, which is just revving up, will tell the real tale;
if some resilient growth stocks react well to their earnings
reports, it could be the impetus needed for institutional investors
to begin putting money back to work.
With that in mind, two stocks I think you should watch (both from
the Internet group) are
TripAdvisor is the leading online travel information site, with
millions of user reviews (and another few dozen every minute) on
hundreds of thousands of hotels, B&Bs, inns and even
restaurants. What we like best here is that the firm serves a real
mass market and it's the hands-down leader in the field-despite
potential competition from others like Google, TripAdvisor has a
huge head start and is benefiting from the network effect (more
reviews = more traffic = more advertising).
TRIP was spunoff from Expedia in December and the stock has
performed well since-it's actually been gyrating higher in recent
months, nosing out to a new high today. It reports earnings next
Tuesday (July 24) evening, and while I think you could nibble here
(maybe buying half of what you'd normally buy, dollar-wise), I'm
more interested in seeing if the stock can extend its gains
following its quarterly report.
Zillow is the leading online real estate website. The big
idea here is that real estate agents spend about $6 billion per
year in advertising, and most of that is off-line; Zillow itself
has just 1% of the total! Given its booming traffic (especially
from mobile devices), it's a matter of time until more agents pay
higher prices to place ads ... and in these cases, the "ads" are
actually content from a user's perspective, connecting them with an
agent with knowledge of a property.
Z is a very volatile stock and is somewhat hard to handle-shares
sank from 44 to 31 during the market correction. But the company is
growing sales and earnings at triple-digit rates, and Z has stormed
back toward its old peak. I wouldn't plow in here, but a low-volume
pullback toward 40 could be worth a nibble, with the real test
coming August 7, when the company will report earnings.
There are a lot of uncertainties, of course, but I think both of
these stocks have big potential if the market gets going.
All the best,
Cabot Market Letter