Here at Cabot, we make it a point to be available to
subscribers, mostly via email but sometimes over the phone.
Providing the service takes time, but we think it differentiates
us from most investment advisors that send you a newsletter and
then turn the other way.
Not only does our being available boost customer satisfaction, it
also gives us an insight into how most subscribers are feeling at
any given time. Carlton Lutts, Cabot's founder, used to
call this the Telephone Indicator (this was way before email).
When the market rallied for a few weeks but the phones were
silent, he knew most people had yet to get excited ... meaning
the market likely had further to run. Most of the time, it
Anyway, I'm not going to write about market timing here; for what
it's worth, I think most people are generally optimistic about
the market ... but are watching the door in case the bears
suddenly take control. Take from that whatever you want.
What I want to focus on instead is something that happens every
time the market has a few bad days, like we saw early last
week: I get inundated with emails and phone calls, 80% of
which ask me something like "What do I do with XYZ stock now that
it's down 5 points?" It's like clockwork-a bad couple of
days and I have a couple dozen emails all asking generally the
Now, such questions aren't necessarily "bad"; you should care
about your stocks and what they're doing. And I'm happy to
answer these questions whenever they come in.
But if you're someone who often wonders "What should I do?!?," my
conclusion is that you're not doing enough planning ahead of
time-before the market or your stocks go against you.
It's really just simple human nature. When things are going
your way (in this case, when your stocks are heading north),
there's no urge to think about negative outcomes; we all like to
bask in the glow of the profits we're accumulating. But the
great investor does think about what could go wrong ... and more
importantly, what s/he will do if something bad happens.
Having such contingency plans is important for a few reasons-the
most important is that you'll be following a plan that was made
when the market was quiet and your emotions were on an even
keel. Contrast that to most investors, who wait for things
to hit the fan ... and then react (or, more likely, overreact)
based on how they're feeling at that second.
The bottom line is that, after six months of a great market
rally, we're going to run into a serious correction
someday. But success doesn't come from predicting when the
market will pull back, how much it will eventually fall,
etc.-those are unknowable things. Instead, you should start
thinking now about how you'll handle the inevitable down
period-what you'll sell or buy, where you'll sell or buy, and how
much you'll sell or buy.
Your plan doesn't have to be exact to the penny, but it should
give you a roadmap to follow whenever the storm clouds
gather. Doing this will improve your results-I can
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Switching gears, I've been writing in my publications (Cabot
Market Letter and Cabot Top Ten Weekly) about many
stocks-especially the popular leaders like Netflix, Baidu, F5
Networks, etc.-being "late-stage." And, as in the example
above, I usually get a few emails pertaining to that comment.
"Why would you say XYZ stock is late-stage if its story is so
good and its earnings growth (even its earnings estimates) is so
strong?" The answer is relatively simple-history tells us
that, no matter how good the story or earnings, growth stocks
tend to have a shelf life. Usually their greatest
performance comes in a 12- to 24-month period.
"But wait!," says the skeptic. "What about Apple this
decade or Cisco during the 1990s, both of which rose (or, in
Apple's case, is still rising) for years?"
Even with those exceptional stocks, there were usually one or two
major, prolonged corrections that took the stock down in a big
way, knocking out all the weak holders ... and effectively giving
the stock a new lease on life. Looking back at it today,
yes, those stocks had multi-year runs. But I actually
consider them having as separate advances, split up by some
Cisco, for instance, had a huge three-year run into early 1994
... and then fell 54% over a five-month period! Then the
stock spiked into 1998 before suffering a three-month, 41%
retreat. Apple did something very similar this
decade-despite strong sales and earnings growth, the stock
cascaded 42% from January through July of 2006, yes, even as the
overall market was generally healthy. And then shares took
another 61% haircut during the 2008 bear market.
There are no sure things in the stock market, but history tells
us that, at first, a growth stock and story are relatively
undiscovered. As time goes on, more people discover the
story and buy the stock, driving it up. But after a year or
two, pretty much everyone knows the story ... and thus, most
investors have already bought their position! For example,
does anyone not know that Netflix has a great streaming video
business? Does anyone not know that Baidu is strong because
it's the leading online search player in China?
In other words, these names become relatively obvious ... and in
the stock market, the obvious rarely works for long. There
have recently been numerous breakdowns among these later-stage
stocks, such as F5 Networks, Amazon, Salesforce.com and possibly
Netflix, which is looking very heavy.
Now, with that said, I am still a trend-follower at heart, so I
need to see a decisive breakdown in a stock to really get
negative toward it. In Cabot Market Letter, we're still
holding on to some shares of Baidu, which we originally purchased
back in July 2009 (around 32).
But the market is an odds game, so when looking for stocks that
can make major upmoves in the months ahead, it's usually best to
hunt for newer merchandise-possibly a stock or sector that just
lifted off a few months ago, or one that has already passed
through a major, multi-month correction and base-building phase
to get rid of all the weak hands. Assuming these stocks
also have a great story and outstanding growth, these "fresher"
names often have more upside potential.
With that in mind, my stock idea this week is
, which is in the exciting business of ... cranes.
Seriously! The big idea here isn't that the company has
something terribly new and exciting, but that, as one of the
largest crane operators in the world, Manitowoc is highly, highly
leveraged to the business cycle-when business is good, it's very
Unfortunately, the company's business was in tatters for much of
the past couple of years, but that changed in the fourth
quarter. Earnings, while still at low levels, beat
estimates by a wide margin, and more importantly, Manitowoc's
backlog for its crane business soared 28% from the previous
quarter. Combine that with optimistic words from the firm's
top brass on the conference call, and institutional investors
took it as a sign the upturn had begun.
And so these big fish bought shares ... a lot of them! MTW
soared nearly 40% five weeks ago on volume that was more than
triple average. Better yet, this move took the stock out of
a nine-month basing formation-really, the stock's first major
launching pad of the bull market. Said another way, MTW is
not "overowned" by the institutional crowd or overly obvious to
the retail crowd; if anything, we think many big fish will be
trying to build positions over time, as it's a relatively sure
bet that this company's earnings have bottomed and will head
significantly higher in the quarters to come.
During the market's recent bout of indigestion, MTW fell from
nearly 22 to 18.5, but has held up well since, still meandering
just south of 20. Shares might need a few more days or
weeks to consolidate, but I think buying in this area, or on
weakness into the 18 range, will work out over time. MTW is
likely still in the early stages of a big-picture advance that
should play out over months.
All the best,
For Cabot Wealth Advisory
Editor's Note: Mike Cintolo is VP of Investments for Cabot, as
well as editor of Cabot Market Letter, a Model Portfolio-based
newsletter of the best leading growth stocks in the market.
It's been 50 months (just over four years) since Mike took over
the Market Letter, and if you invested $10,000 when he started,
you'd be sitting on north of $16,000 today ... compared to just
$9,200 if you'd invested in the S&P 500! He's beaten
the market by 14% annually thanks to top-notch stock picking and
market timing. If you want to own the top leaders in
every market cycle, be sure to give Cabot Market Letter a try by