Last week, a long-time subscriber from Minnesota wrote, "It
seems obvious to me that the only way out of this 'ECONOMIC
CRISIS' is to inflate the dollar. Please comment on the likely
effect of Bernanke's plan to issue more Treasury Bonds to 'fight
unemployment' and to stir the pot for inflation. This should
artificially cause my portfolio 'value' to explode exponentially
and result in a huge tax bill when I sell."
I replied with this:
"Thanks for writing. You may be right. In any case,
the key to successful investing remains unchanged. Watch
the market carefully, interpret unbiasedly, and act accordingly.
As Jesse Livermore wrote, "Markets are never wrong;
But that was a very short answer. Here's the long version,
for all my readers.
For almost two years now-since the crash bottom in 2008-I've been
reading that the flood of money that the U.S. government has
poured into the system will cause inflation … but it hasn't yet.
Because both consumers and businesses are deleveraging.
They're cutting back on debt, either because they want less
exposure to risk (having witnessed the pain caused by excessive
leverage in 2008-2009) or because banks have forced them
to. And they're spending less and saving more because they
have little confidence in the future of our country's
economy. (Having a Clinton or a Reagan in office would help
on that front.)
And my opinion-which I've stated here before-is that this
deleveraging will continue far longer than most people
expect. So you shouldn't worry about inflation. In
fact, I believe that because inflation was the bogeyman of the
1970s, you won't need to worry about it until most people who
coped with it then are dead!
But these opinions are worth less than two cents when it comes to
investing in the stock market, and here's why.
When it comes to stocks, the best indicator of what a stock will
do tomorrow is what it did today. And the best indicator of
what a stock will do in the next month is what it did in the past
month. In short, the stock itself is a
indicators are things like sales and earnings. In the long
run, they are vitally important, which is why institutional
investors spend so much time analyzing financial statements and
projecting future earnings. But in the short run, they're
not much help.
indicators are things like inflation rates, unemployment rates,
housing starts (these days it's foreclosure rates), trade
deficits, the value of the dollar, industrial production rates,
the price of oil, etc. They matter to some extent, but
they're the least helpful of the three groups.
So why do people spend so much time talking about these things,
if they're not much help?
Because everyone else is doing it, and thus it feels comfortable.
And because it's intellectually easier than taking about charts.
Even the dimmest bulb knows enough to say, "Unless unemployment
rates come down soon, it's going to be a rough holiday season."
But try talking about last Thursday's big gap up by
, on three times average volume, and in most circles you get
Yet one picture of that Netflix chart (to me) is worth a thousand
It tells me that investors in Netflix aren't thinking about
whether Bernanke's moves will raise the inflation rate. And
they're not worrying about their capital gains being eroded by
No, they're excited by the company's
rate of revenue growth-31% in the third quarter, up from 27% in
the previous quarter. They're impressed by Netflix's
, which has managed this fast growth while maintaining after-tax
profit margins between 7% and 9%. They're thrilled by the
prospect of recurring revenue from 16.9
subscribers. And they're salivating over the company's
lower costs of customer acquisition.
I'm excited about all those things, too. But … remembering
that these are all secondary indicators, I put the greatest
weight on the action of the stock itself, which is why that big
gap up on high volume speaks volumes to me.
And I don't worry about inflation at all.
Editor's note: Netflix (
) has been favorably mentioned here before many times, but we
mention so many names that you may have missed it.
If so, you should consider subscribing to Cabot Stock of the
Month, which focuses your attention on one high-potential stock
Netflix was featured in Cabot Stock of the Month way back in
February, when it was trading at 65. Back then, editor
Timothy Lutts told his subscribers, "Today's story is about
revolutionary new ideas. They lead to great growth
companies, and they lead to great growth investments. In
Cabot's case, successful revolution-driven investments have
included Amazon.com, Yahoo!, Google, Crox, XM Satellite Radio,
Qualcomm, Taser, Home Depot, Intuitive Surgical and Green
Mountain Coffee. Going forward, we expect many more, and we
expect Netflix to be one of them."
Subscribers who bought back then are looking at profits of 166% …
and looking forward to more.
If you'd like to get in on the ground floor of the next Cabot
Stock of the Month (out tomorrow),
Now, one "problem" some people have with investing in Netflix is
the stock's price. It's roughly $170 a share. Ditto
, trading above $300 and
, trading above $600.
If you're in the habit of buying a round thousand shares of a
stock, you're going to balk at the prospect of buying these
stocks. We know; we've heard that message from many readers
in recent weeks. But you shouldn't! Those high prices
don't stop the pros, so why should they stop you?
If anything, you should
stocks with higher prices, because it means they won't be tugged
up and down by the emotional actions of amateurs.
So if you can't afford a thousand shares, just buy 10 or 20 or
100. At the end of the day, it's the dollars that count,
not the shares.
As to individual stocks,
Today I want to highlight another company demonstrating
acceleration of revenue growth AND acceleration of earnings
growth. The reason I like these characteristics in a stock
is that it tells me analysts have to keep ratcheting up their
estimates, and thus their targets, and so institutional investors
have to keep buying more. And it's institutional investors
that drive stock prices.
The company is
Riverbed Technology (
, and its business is booming today as companies all over the
world work to make their Wide Area Networks (WANs) work faster.
Like Netflix, Riverbed saw its stock gap up last week after an
excellent earnings announcement.
Just look as these numbers.
While analysts were expecting revenue of $135.3 million, the
company pulled in $147.8 million!
And while analysts were expecting earnings of 27 cents a share,
the company earned 34 cents!
Guess how fast those analysts are revising their estimates now,
and how fast price targets are being raised, and how fast buying
plans are being revised.
And it's not the first time!
Just three months ago, after the company released a crackerjack
second quarter earnings report-and the stock gapped up-Mike
Cintolo added the stock to the Model Portfolio of Cabot Market
Letter, writing, "The company's Steelhead hardware and software
are the best at WAN optimization. In a nutshell, that simply
means that Steelhead makes a company's network-which could span
across a campus or a continent-much faster. And that allows not
only higher productivity among workers, but also helps customers
avoid the cost and time of constructing entirely new networks.
Looking ahead, the importance of corporate networks (and thus,
the demand for faster speeds) is only going to increase,
especially as companies put more and more of their resources in
far away data centers. Riverbed's second quarter report was
outstanding, causing the stock to gap out of a consolidation.
And, impressively, it hasn't given up any ground, even during the
minor market pullback of the past couple of days. Shares could
always drop a point or two, but we think buying here will work
out over time."
When Mike wrote that, the stock was trading at 36.
Subscribers who followed his advice are looking at three-month
profits of 56%, with the expectation of much more ahead.
To join them … and to be assured of getting the all-important
profit taking sell signal on RVBD when the time comes,
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory