I want to spend some time today writing about four things that
don't matter when deciding which stocks to buy, which ones to
sell and when to sell them. I've touched on some of these
topics before, but have gotten a flood of questions recently and
figured now's a good time to clear some things up. Here we
INSIDER SELLING: When most people hear about insider
selling, they immediately think the worst. Specifically,
most young growth stocks have oodles of insider selling, and so
the question arises, "If the top brass is selling X million
shares, why should I be buying?"
But the real question you need to ask yourself is "Does insider
selling have any correlation to future stock performance?"
As far as we're concerned, the answer is no. You see, many
young, dynamic growth stocks throughout history have had a ton of
insider selling on the way up. The reason? Lots of
these management types take less salary and get rewarded with
options and restricted stock, so when the opportunity comes to
cash in, they do so. Many actually have prearranged selling
Either way, the fact is that just about all of the big winners of
market lore have experienced a bunch of insider selling during
their major moves up. Sure, there have also been some
stocks that crashed and burned after a lot of insider selling,
but that's the point-there's no consistent correlation between
insider selling and stock performance.
I rarely even look at insider selling when researching a stock,
preferring to focus on institutional ownership trends (i.e.,
whether mutual funds, pension funds and other big investors are
building positions), which is what really counts.
STOCK PRICE: This one comes up again and again. If a stock
is priced at, say, 300 dollars per share, most people will avoid
it because they can't buy many shares. Thus, many investors
specifically hunt for stocks within a certain price range-say,
between 20 and 40, or something like that. But that's a big
The fact is, the price of the stock means nothing; stocks move in
percentage terms. Said another way, a stock like Google,
priced north of 600, can easily move 15 or 20 points in a
day, whereas a stock like Rovi Corp., priced around 50, has a
good day if it's up a point and a half. So owning fewer shares of
Google can be just as profitable.
Again, it's not a matter of favoring higher-priced stocks as much
as it's a matter of not caring much what the price of the stock
is … assuming it has solid sponsorship and, of course, a great
story. Early on in a bull market, many of the best names
might trade at 20 or 30 because the prior bear market dragged
everything down. At a time like now, 18 months into a bull
move, the best stocks might be north of 100.
I can say that, for whatever reason, many of the bigger winning
stocks of the past couple of cycles have come from relatively
higher-priced stocks. Maybe that's because fewer companies
are splitting their stock, or maybe it's just a
coincidence. I don't know. But I don't have to know
because the price of a stock isn't a main determinant of its
performance … so I generally ignore it.
One last note on stock prices-so many investors are obsessed with
stock splits, thinking it's a good thing. But I can tell
you that, historically, a stock often begins to correct, or tops
out altogether, after a split (especially a big one, like 3-for-1
or larger). I actually prefer to see my stocks avoid
splits, which usually gives them a longer lifespan.
SEASONALITY: It's true that, at times, you can gain a small
edge in the market because of seasonal tendencies. Heck,
I've even written about the four-year Presidential cycle, and how
from the low of the midterm year (2010) to the high of the
following year (2011), the average Dow gain is 50%! It
helps give us a big-picture view of the market environment.
However, there's a big difference between having a background
view based on the calendar and taking a bunch of action because
of it. This year, for instance, I heard the usual catcalls
in late August about how September is by far the worst month of
the year for the market. Except for this year! The
market surged about 10% in September, kicking off its major bull
move. Selling a bunch of stocks in late August was the
exact wrong thing to do.
One investor I've read refers to seasonality as providing a
gentle breeze at the market's back (or in its face). But
that's about it. If making money based on the calendar was
that easy, we'd all be rich … yet that is not reality.
PRICE TARGETS: If you have a proven value investing system,
then using target prices makes sense. But I've received a
few emails that go something like "XYZ stock just surpassed the
average analyst target price of 31; should I sell?" Our
It's not the analysts whose opinions matter, it's the big
investors that control trillions of dollars that matter.
And if they're buying hand over fist, that means they're
anticipating business being even better than many optimistic
scenarios from the analysts!
Remember, analysts don't have crystal balls. Many do good
work, but their estimates of what stocks are worth are just their
opinions. And the only opinion that counts in the stock
market is, well, the market's own opinion!
This also applies to analyst upgrades and downgrades. Lots
of investors obsess over such chatter, and yes, sometimes it
affects the stock longer-term. But plenty of times it
doesn't! Thus, we wouldn't spend much time focusing on
other people's opinions; focus on the market and the stock
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For my stock pick today, I'm going with an old favorite that
looked like it was toast a few weeks ago … but now shares have
begun to round out nicely and could (emphasis on could) be near
the start of a new upleg.
I'm talking about Salesforce.com (
), which is a blue-chip play in the cloud computing space.
Actually, the company is more "the next Oracle" in that it
continues to deliver innovative software products to its
thousands of corporate customers.
And, of course, all of its products are delivered on-demand, so
there's no need to install or continually upgrade at every users'
terminal; Salesforce does that centrally, and the programs are
accessed over the Internet. That's the nature of cloud
The stock has had a very long run-up during the past year, and it
initially got off to a good start when the market got going in
early September. However, as it turned out, the stock's
inability to correct and consolidate much during the market's
spring correction (from April through August) meant that there
were still lots of weak hands owning shares. And when that
happens, a trend change can be on the horizon.
Sure enough, CRM plunged through its 50-day moving average on
huge volume in early October; for any prudent investor, that was
a signal to at least lighten up, if not bail completely.
But the prudent investor also keeps such a stock on his or her
radar screen-sometimes these leaders can re-base after such a
decline, and that's exactly what Salesforce.com appears to have
All told, the stock fell from 124 to 98, but is now sitting
around 115 on light volume, in the seventh week of a basing
structure. The company is set to report earnings next
Thursday evening, and my guess is that if (but only if) CRM can
power above 120 following its earnings report, the stock could
have a good run in it. An adverse reaction, however, would
likely put in a more meaningful, longer-term top.
So what's my prediction of what CRM will do? Nice
try! I don't predict because I don't need to. I think
it's best to keep an eye on the stock and to take a stab at it if
you see a powerfully bullish reaction to its report next Thursday
Until next time,
For Cabot Wealth Advisory
P.S.: Michael 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. Thanks to
top-notch stock picking and market timing, Mike's simple to
follow and concentrated (no more than 12 stocks) portfolio has
crushed the market by 15.4% annually since the start of 2007! If
you want to own the top leaders in every market cycle, be sure to
give Cabot Market Letter a try by