The Best Stock Story in the World

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Stock Market Video

The Best Stock Story in the World

Let the Mind Go Where It Will

In Case You Missed It

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In this week's Stock Market Video, I see a strong market, but not a perfect one. There are lots of stocks doing well and the big indexes are all rallying, so it's time to get some money off the sidelines. Several factors, including the fact that it's August and some big macroeconomic uncertainties need resolution, indicate that it's not a time to jump into the deep end, but you should certainly be getting your feet wet. Stocks discussed include: 3D Systems ( DDD ), AO Smith ( AOS ), Weyerhaeuser ( WY ), SolarWinds ( SWI ), Under Armour ( UA ) and Regeneron Pharmaceuticals (REGN) . Click below to watch the video!

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The Best Stock Story in the World

When the big oil spill in the Gulf of Mexico was fouling the waters and shores, there was some talk of oil-eating microbes that were experiencing a growth spurt from the additional food supply. And there was some hope that microscopic petroleum connoisseurs like Alcanivorax (one of my favorite oil eaters, and I hope one of yours) might actually help to mitigate the environmental damage.

As it turned out, the sheer bulk of the BP/Amoco spill overwhelmed the appetite of these willing bacteria, but the principle that a concentration of almost any resource will trigger a response from nature is a sound one. If it's edible, something will appear to eat it.

One resource (?) that we have right now is a superabundance of toxic debt, which is a blanket term for the mortgage-backed securities (MBS) that inundated the financial world during the Housing Bubble. MBSs are bonds based on the revenue stream from a packet of mortgages, a foundation that the market found reassuring in 2007 because, after all, it was based on the value of housing, which was going to go up forever. Right?

Many people (me among them) see the massive amounts of rotten MBSs festering in the basement as the real reason the economic recovery is taking so long to develop. Taken collectively, banks and other financial institutions have so much toxic debt on their books that they're as risk-averse as fixed-income retirees. They have taken the money doled out by the government and put it into Treasuries rather than get back into mortgage lending. 

But, as nature has taught us, there is something out there that will eat anything, and for toxic debt, that something is Ocwen Financial (OCN).

Ocwen used to be a conventional mortgage lender, back when that was still profitable. But these days the company has moved into the mortgage servicing business. That is, it takes over the billing of mortgage payments, the counseling of underwater homeowners and refinancing negotiations where possible, and foreclosures where necessary.

While Ocwen isn't buying MBS directly, the company's independent analysis of the actual value of the underlying mortgages allows the value of the bonds to be correctly adjusted to the reality of the market. Assigning values to junk mortgages is a job the banks haven't wanted, but they're willing to hand the work off to a reliable third party, and Ocwen is very good at it.

Analysts expect that about $4 trillion (with a "t") of mortgages will be farmed out to servicing companies in the next few years, and Ocwen Financial is expected to get a nice chunk of that business.

It's a great story, easy to understand and with enormous upside potential. But, of course, that's also what makes me think twice about it.

OCN began a steady climb in late 2010, climbing from below 9 to almost 17 in March 2012. A quick, seven-week correction to about 14.5 then gave way in May to a high-volume rally that kicked the stock to 20 in just 10 weeks. And then it really began to soar. From the end of July until now, OCN has roared to 25 before cooling off a little this week.

My point isn't just to torment you with the chart of yet another big winner that you've missed out on. You can get enough of that from any number of places.

No, my first point is that the power of a good story is so compelling that you have to work hard to protect yourself from it. I've know people who could tell the story of a stock at a cocktail party and have four or five listeners ready to put their life savings into it. 

It happens that Ocwen Financial is a solid firm with good long-term earnings (and appearances in Cabot Top Ten Trader dating back to 2006 when it was just a mortgage lender) with a solid chart. 

But story stocks sometimes have nothing but that story going for them, and that's not good.

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The second point is that by the time you finally hear the story, it's often too late. 

My brother on the West Coast has called me a few times after he's listened to a news story about a big event (the earthquake in China a few years back was one), wondering if there is a way to play the aftermath.

All I can say, usually, is that if there is a way to invest profitably, chances are that the big investors have already done it. 

Finally, I would just point out that the best way I know of to find story stocks long before they become widely known is to have a single-minded researcher like Tom Garrity, editor of Cabot Small Cap Confidential, doing the data mining, analysis and writing. Tom's obsessive research routinely finds tiny stocks with monster potential long before the market does. If you have the patience to wait for one of Tom's compelling stories to assert itself, the results can be stunning.  

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Let-The-Mind-Go-Where-It-Will Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

Let the Mind Go Where It Will

This doesn't mean you should daydream. It means you should follow your thoughts and ideas to their logical conclusions, especially when they lead to roads less traveled. The best investments are often the ones that Wall Street has not yet discovered. Original thinking is difficult, and that's precisely why it can be very rewarding.

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 8/21/12 - Imperfect

In this issue, Lou Gagliardi, editor of Cabot Global Energy Investor , tells the inspiring story of one-handed pitcher Jim Abbott and looks at the dangers and opportunities inherent in imperfect markets and gives the rules for survival. Stock discussed: BreitBurn Energy Partners (BBEP).

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Cabot Wealth Advisory 8/23/12 - Profiting from Economic Cycles

Cabot Benjamin Graham Value Letter editor Roy Ward recommends knowing what stage of the economic cycle we're in and using that as a guide to picking stocks. Technology and Consumer Discretionary stocks are poised do well. Stock discussed: Dollar General (DG).

Have a great weekend, 

Paul Goodwin

Editor of Cabot Wealth Advisory



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AOS , DDD , SWI , UA , WY

Cabot Heritage Corporation

Cabot Heritage Corporation

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