Investing isn't Easy, but it's Not as Hard as Many Make it Out
Stick with the Liquid Stock Leaders
A $20 Billion-Plus Backlog!
I often write about the cornerstones of investing, including
some pitfalls that befall novice-to-intermediate investors.
Cutting losses short, which I wrote about in my last Cabot Wealth
Advisory, is a good example.
However, something I see from even the most experienced
investors (I keep in touch with a handful of professionals every
week, from brokers to hedge fund managers to pension fund
advisors) comes from the desire to deliver performance that's
"special" or "outstanding."
Many times such a desire results in investors taking big
risks-possibly buying too big a position in one stock or sector,
or going on margin after many months of good performance,
etc.-that can pay off at times. However, in the market, easy
money is hard to hold onto, and eventually such outsized
risk-taking comes back to haunt investors.
Another way the desire to be outstanding presents itself is
through the types of stocks people buy.
I see it all the time-at the start of a market upmove, it's
difficult to get people to put money to work in even an index
fund, but a few months later, people are reaching for low-priced
story stocks that are selling for two bucks but supposedly have a
new drug/new oil well/new something that will push the stock to
Now, I'm not dumping on low-priced stocks. If it's part of
your system (like Cabot Small-Cap Confidential), great. Rather,
I'm referring more to the lower-quality names that lack the
traits we usually look for ... but have an enticing enough story
to get some investors to take the plunge.
Of course, I've fallen into this same trap, too. Years ago, I
regularly tried to find up-and-coming winners before anyone else.
However, hundreds of trades later, I discovered a secret that
changed the way I invested.
The secret is that to garner big returns, you don't have to
take undue risk or only shop among story stocks. Instead, you
need to focus on what are called the liquid leaders.
A couple of decades ago, it really did pay to focus on tiny
stocks; there wasn't as much money floating around in mutual,
pension and hedge funds, and so, while there were always big-cap
leaders during bull markets, you could do even better in smaller
Today, however, the number of funds has grown exponentially,
with trillions of dollars sloshing this way and that, chasing top
stocks and sectors. Because of that, during the past 10 or 15
years, we've seen the rise of what I call the "liquid leaders"
during any given market advance-the 10 or 20 well-traded,
well-sponsored growth stocks that funds pile into when times are
These names change cycle to cycle, but once they start
trending higher they remain on institutions' favored lists for
months, if not years.
While I don't have a strict definition of what makes something
a liquid leader, I'm generally talking about stocks that trade at
least $100 million on volume per day (usually much more) that
have great growth and a new (and hopefully revolutionary) product
or service that serves a mass market.
Chances are you already know most of them from the last few
years. Apple (
) was one, of course, as were Priceline (
), Baidu (
), Netflix (
) and Chipotle Mexican Grill (
) during the 2009 to 2011 timeframe. From mid-2011 through last
year, there weren't many liquid leaders that really did well,
though Equinix (EQIX) was one and some of the leading
So far this year, names like LinkedIn (LNKD), Cree (CREE),
Celgene (CELG), Netflix (
) (again!), some of the leading financials like Citigroup (C) and
Goldman Sachs (GS), Chicago Bridge & Iron (CBI) and others
look like liquid leaders, with hopefully more to emerge in the
In the distant past, such leaders did well enough but rarely
put on a great show. These days, however, these liquid leaders
can soar over a few months or couple of years ... and yet, they
usually have much lower volatility and tend to have fewer major
"accidents" (huge drops on downgrades, share offerings, negative
rumors and even earnings) along the way.
Moreover, these stocks tend to be more in sync with the
market, which can be easier on the psyche; it's tough to see the
Dow ramp up for a few weeks while your stocks do nothing. That
can often happen with illiquid stocks, which dance to their own
The upshot of all this is that I think a growth stock investor
should aim to have at least half of his money in liquid leaders;
frankly, I don't think there's anything wrong with focusing
solely on these well-traded names, especially if you have a
relatively large account. I know of a few hedge fund managers
with great track records who do just that.
To be clear, there's nothing wrong with owning a few smaller,
newer companies, but it's best to keep up with those bigger,
liquid stocks that are leading any market advance. Chances are
they'll perform as well, or even better, than their smaller
Not surprisingly, my stock idea today is one of the liquid
leaders, but it's one that few investors are aware of. It's
Chicago Bridge & Iron (CBI)
, a leading engineering and construction firm for major projects
worldwide. I'm not talking about commercial real estate or
anything like that; CBI designs and builds things like liquefied
natural gas facilities, steel plate structures and petrochemical
Normally, this is a solid business with some ups and downs
along the way. But, for whatever reason, Chicago Bridge &
Iron is firing on all cylinders now, bringing in a ton of new
orders (lots in the energy and chemical fields), and most
important, its recent acquisition of peer Shaw Group could be
In the most recent quarter, it beat estimates on both sales
(up 22%) and earnings (up 30%), and it exited the year with an
$11 billion order backlog, thanks to a whopping $7.3 billion of
new deals won last year (including $2.8 billion in the fourth
quarter alone!). For comparison, the company brought in $5.5
billion in revenue last year.
All of this could be just the tip of the iceberg; once Shaw is
completely integrated, the company's backlog should be north of
$20 billion, and that should include a well-diversified mix of
projects by geography, industry and contract type.
That's one reason earnings estimates have moved up sharply;
analysts see the company earning about $4 per share this year, up
30% from last year, whereas their expectations were for just
$3.50 a couple of weeks ago. In 2014, the bottom line should rise
another 20%, which isn't bad for a stock trading at just 19 times
What really impresses me about CBI is its chart-it remains in
a firm uptrend, having kited higher with hardly any weakness
since mid-November, hitting new all-time highs after a
multi-month consolidation. It did pull back normally during the
market's February weakness, but it quickly regained all of its
lost ground and more, hitting new highs last week. It barely
hiccupped from the Cyprus news over the weekend.
I mentioned CBI in a Cabot Wealth Advisory a few weeks ago,
and with the overall market looking fine, I think you should sit
tight if you own some. But if you don't, try to get in on a dip
toward 55 with a stop near 50.
Until next time,
Editor of Cabot Market Letter
and Cabot Top Ten Trader