The Next Cisco

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Last week I took the occasion of my uncle's funeral to ruminate on the question of whether the geographic mobility of Americans, which has been a tonic for economic growth, has had an unexpected cost-the loss of small-town values-and whether the reduced mobility caused by the end of the housing boom and the Great Recession might help us recover some of those values.

Your feedback was excellent, with many writers supporting my hope:

"Tim, I could write page after page about your Uncle Mose, but I won't; I would be here all day. To me he represents what America is about and what makes America great. I still live in the town I was born in, to me life should be how your uncle lived and to millions of Americans it is.

"In my part of the country, when I was growing up, you didn't worry about what was happening in the rest of the world-the big worries were Friday night football, basketball at the end of football season and then baseball after that, rabbit hunting or quail hunting after school or weekends and fishing and swimming in the summer. Volunteer firefighters were to be looked up to and admired and so were policemen. We didn't even have a two party system-everyone ran on a democratic ticket and elected officials were expected to do the right thing, because it was the right thing to do. When people needed help you helped them, because they needed help and you could. We didn't have locks on our doors but we had a hook on the screen doors, to keep us kids out while mother was taking a nap. If we needed or wanted to go somewhere and didn't have a ride we walked, hitchhiked, rode a bicycle and sometimes rode our horse.

"America was your uncle and all the other Americans like him, and then I grew up. Your uncle was and still is my kind of hero and the kind of person that will always make this country a great place to live. I think that America is waking up again and saying those days had a lot to offer and maybe we need to look back and learn from people like your uncle. He would have fit very well in Tennessee just like he did in Massachusetts."

G.L.
Memphis, Tennessee

---

One writer identified some of the flaws of insular small-town living:

"Some of those 'charming' small communities are places to escape from rather than to.  Typically, one is destined to be an insider or outsider in those small communities, dependent largely on who were their people and where they prepped, or didn't.  Upward mobility is a hard thing to accomplish in such places regardless of one's personal attributes.

"My parents, along with others who had any get up and go in them, left the type of community you glowingly describe after World War II.  What was once a vigorous, prosperous community built on steel mills, glass making and coal mining today resembles a ghost town.  When my father and I returned for his 50th high school reunion, the demarcation between those who had stayed and those who left was crystal clear.  Those who stayed generally looked like death warmed over, while those who left had more energy, spirit and visible health.

"Give me the privacy and opportunity of a large urban area over the provincial, closed-minded, petty ways of most small communities.  A person's contributions, accomplishments and being should not depend on whether one is descended from Mayflower passengers, but who and what a person represents in his/her own right and lifetime."

F.V.


---

And several correspondents said we could never go back, particularly a gentleman from the Golden State.

"I enjoyed your commentary about your mother's brother but I think the genie is out of the bottle. I was raised in what had been a small farm (apple orchards, and corn) town in Connecticut. Now I live in Los Angeles. I have lived in New York, London, Beirut, Saigon, San Francisco and Maui. My younger sister lives in Hanover, NH. My middle sister lives outside Chicago. One of my cousins lives in Honolulu, several live in Monroe, CT, one lives in Michigan, etc.

"My ex-wife was raised in a small town in northwest Connecticut. I met her in Los Angeles. She later moved to San Francisco and then Whidbey Island near Seattle. Now she lives in Raleigh. My girlfriend was born and raised in Wyoming and then when her parents divorced, she and her mother moved to Santa Monica where her mother's sister lived. Now she lives in Palm Desert, CA near Palm Springs. One of her sister's daughters lives in London and the other in Greensboro, NC.

"Home is where the heart is. And the continual upheaval is most likely the underlying reason for the success of Facebook and YouTube as well as other social network sites. FYI, the University of Southern California Annenberg School of Communications now offers a Master's Degree in Social Networks. The program was started with a $5 million donation from Walter Annenberg's grandson. Who would have thought that you could obtain a Master's Degree in Social Networks?

"Traditional communities are dead."

E.R.

I replied,

E.R.,

"Thanks for writing.

"I agree totally that mobility has been great for our economy, but I don't agree that traditional communities are dead, nor the virtues they foster.  They're just harder to find amid the cacophony of modern civilization."

And he replied,

"I understand your view but you live in an old town in Massachusetts and it is far removed from reality in Georgia, Florida, Texas, Arizona, Nevada and California. I was raised in a town that was established in 1634 and the original bridge over the river dividing the town has large marker stones engraved with the names of the founding families. Some of the families were still residing in the town when I was a child. One of the families still owned the local savings bank, another the hardware store in the center of town, and still another the mortuary. My parents and their peers were considered 'outsiders' because they purchased land from the heirs of a centuries-old farm, and constructed houses.

"Now I live in a neighborhood that was the original tract development in the San Fernando Valley section of Los Angeles. The model home-diagonally across the street-was built in 1933 and my house was built in 1934, 300 years after the establishment of my hometown. At the time the houses were built, the San Fernando Valley was not part of Los Angeles and the three-street development map was filed with the Mission San Fernando. Until the early 2000s there were still some original or second-generation owners in the neighborhood. The model home is still owned by the son of the original owners.

"But death and exploding real estate prices rapidly transformed the neighborhood during 2005-2008. Now, not only are the original owners gone but so are the houses. The house next door to me was sold during June 2008 after the long-time owner died. He left the house to his son and daughter and they quickly sold it for the money. An Israeli real-estate developer bought the property and now I have a 6000-square foot, two story McMansion next door, surrounded by eight-feet high concrete block walls and a concrete driveway that occupies two-thirds of the front yard, The developer sold the house to relatives and they do not talk to anyone in the neighborhood.

"It is not the only McMansion in the neighborhood-there is a new 5,000-square foot Tuscan villa diagonally across the street to the east. The owners never talk to anyone.  One block south, the old original chicken farm was sold to a developer after the original owner died. Now there are three very large, two story houses. And adjacent to that was a walled estate on 3 acres that once had been occupied by Clark Gable. The son of the original owner partnered with a developer and now there are four 6000-square foot houses. At the west entrance to neighborhood, on what had been the rear yard of a house, now sits an unoccupied 14,000 square foot house, with an unfinished interior because the owner ran out of money.

"The big battle in the neighborhood is about McMansion development. There are some like myself who are trying to preserve the neighborhood but there are many others who simply want to buy, demolish and build a large house for resale. There is very little sense of community. The local residents council is really just a half dozen people. Occasionally for a big issue, 40 people may appear at a City Council of Zoning Board meeting.

"I have a friend who in the late 1990s moved to a guard-gated golf course community in Las Vegas. He recently told me that he is moving from the community because owners change so frequently that the neighborhood is rapidly deteriorating. Few of the short-term owners pay their monthly community maintenance fees, so the fees keep increasing and the stable owners are suppose to shoulder the burden.

"On Maui, I lived in a spectacular $2-million oceanfront condo that a friend had purchased as vacation-home/investment. But his wife didn't like Maui because in Los Angeles her days are spent clothes shopping and visiting trendy nail or hair salons. After six months I only knew one other resident. Apparently almost all the condos were investments because they were seldom occupied. My only community was a small group of people at the local yoga studio and people who windsurfed.

"My girlfriend moved to Palm Desert to help take care of her dying father. She says Palm Desert and La Quinta are littered with for sale signs and that many of the people who purchased houses five years ago are gone. She is caught between a proverbial rock and hard place because houses next to her have recently sold in foreclosure for $300,000 less than she paid for her house. Last month she stopped paying her mortgage because it will be a decade before prices return to the price she paid. Many of her neighbors are doing the same because it will be a year or more before the bank forces foreclosure. Some are using their mortgage payments as down payments on foreclosed condos in golf-course communities, where the price drops are even greater than those for houses.

"Migration in pursuit of the great American Dream (home ownership) has destroyed allegiance to community and the younger generations will grow up as real-estate vagabonds reduced to living artificial lives in virtual communities. I hope you are correct but I fear the Brave New World will be occupied by transients briefly "hooking up" for superficial relationships."

E.R.

---

Kudos to E.R. for providing great detail on the situation, particularly about the travails of people caught in the collapse of the housing industry.

Keeping the focus on the housing industry, I want to step back a little to give you my view of the big picture.

First, understand that a trend, once in effect, tends to last longer and go further than people expect.  It's very true of the stock market, and true of other markets, too.  And it's the result of human nature.

The top of the housing bubble was a perfect example.

For more than three years, we've been correcting the excesses of that top, and I think we have a very long way to go time-wise-probably decades-before we see a real uptrend in housing prices.

As to housing prices, I'm not so confident, in part because of unknowability of inflationary trends in the future.

Today, some 27% of homeowners in America are underwater, meaning they owe more than the market value on their homes.  As they walk away from these homes, they continue to put downward pressure on housing prices.

Over one-third of homes sold in the U.S last year were sold at a loss.

But here's a bright spot.  A large number of new buyers are paying cash!

Partly this is because the banks have got tough, so sellers are happy to deal with cash buyers.  But the banks are not the problem; they're a symptom.

In any market, there is smart money and dumb money.

In the stock market dumb money comes on board late, pays too much and sells at a loss.  It happens in every market cycle.

Smart money-frequently institutional money-buys early.  Smart money sells to dumb money at the top.  Smart money walks away with cash.  And smart money sits on the beach and reads a book while dumb money watches his losses mount.

Eventually, when prices are once again attractive, smart money comes back to the market-with cash-and buys assets from dumb money.  This establishes the bottom for that market cycle, and that's where the real estate market might be today.

Insert image here.

This chart, courtesy of the Wall Street Journal, which got it from Zillow, tells some of the story.

In Miami-Fort Lauderdale, more than half of homebuyers paid cash last year.

The numbers were nearly that high in other former boomtowns.

Now, this doesn't mean-despite the hopes of millions of people-that home prices are going to begin a new uptrend.

But I do believe it means we're beginning the process of putting in a floor.

In the meantime, the odds for profit are much better in the stock market, as long as you know what you're doing.

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---

Which brings me to Cisco ( CSCO ) .

Cisco was one of the greatest investments of the 1990s, surging from a low of eight cents (adjusted for many splits) at the start of 1990 to a high of 82 in 2000. If you'd been lucky enough and courageous enough to enjoy the whole ride, you could have turned $10,000 into more than $10 million.

Of course, at the start of 1990, few investors knew about Cisco.

But even if you'd waited until the start of 1995, when Cisco was very well known, you still could have done very well, turning $10,000 into more than $440,000 … if you'd sold at the top.

But Cisco's salad days are long gone.

And over the past decade, even though revenues have roughly doubled, the stock has come nowhere near its old high.  For the past seven years it's been as lively as a sloth on a hot summer day.  And it doesn't even pay a dividend!

Then last week, after the company reported fourth quarter results that beat estimates, it cautioned investors that government spending was spotty and sales of cable-top boxes were slowing, concluding with an anemic full-year forecast.

In return, investors sold the stock vigorously.  It was down more than 15% for the week.

But there were winners, and some of them were subscribers to Cabot Options Trader, who had been advised on Wednesday to buy the March 23 Cisco Put.

Readers who followed the advice of editor Rick Pendergraft saw those options soar in value as the stock plummeted on Thursday, while Rick quickly advised taking a profit of 148%.

For details, click here.

Now, trading in not options is not for everyone.  Far more people would rather take the less exciting road to wealth, ideally by discovering and investing in the next Cisco.

Well, I have one candidate for you that I've mentioned here before.

Hopefully, you've bought some, because the stock has done very well, gaining 93% since I first mentioned it last August.  Yet it's still unknown to the majority of investors!

The company is Polypore ( PPO ) .

Its products are precisely engineered membranes that regulate the passage of gases and fluids in controlled environments.

Part of Polypore's business is in medical fields-regulating the flow of blood plasma, for example-but that's not where the exciting growth is.

The exciting growth is in energy.

Some of the company's membranes go into the lead/acid batteries of traditional cars.  Polypore supplies more than 50% of the world's demand for high performance polyethylene battery separators to the lead/acid battery industry, and business is booming in some areas, particularly China.

But even more exciting is the growth of the lithium battery market, where the company has a dominant presence.  Notebook computers, mobile telephones, digital cameras, power tools and more use lithium batteries.

The biggest winner for Polypore today is Apple's iPad, which accounted for 17% of Apple's fourth quarter revenues.

But looking beyond the iPad, I see a big market for batteries-and Polypore's membranes-in hybrid vehicles and all-electric vehicles.

And then I see a big market for batteries-and Polypore's membranes-in wind power and solar power installations.  The batteries will be needed to store power, and to smooth delivery, and I think these markets have great growth in front of them.

In the third quarter, Polypore saw revenues grow 10% to $152 million and earnings jump 59% to $0.27 per share.

Fourth quarter earnings will be released after U.S. markets close on Wednesday, February 23, and I'm confident they'll be very good.

Polypore ( PPO ) has been recommended by the advisory I edit, Cabot Stock of the Month Report. Since June of last year, my subscribers have profits of 134%. And every week, I send them an update by email telling them exactly what to do with their shares of PPO.

If that's what you need for investment success, click here .

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
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: CSCO , PPO

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