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Time, Money and Growth Investing
By: Cabot Heritage Corporation
Stock Market Video
Time, Money and Growth Investing
We are a Herd of Independent Mind
In Case You Missed It
In this week's Stock Market Video I talk about the market's two-day swoon this week, seeing it as something to take note of, but not something to cause you to head for the bomb shelter. This may be a blip, or it may be the start of a steeper correction. But you still want to manage your individual stocks using your own loss limits and watching how they act when they approach their 25- and 50-day moving averages. Stocks discussed: Hertz ( HTZ ), Lazard ( LAZ ), Medicines Company ( MDCO ), Qihoo 360 ( QIHU ), Cree ( CREE ), Oshkosh (OSK) and Lennar (LEN) . Click here to watch the video!
Time, Money and Growth Investing
Time is a limited commodity, in fact, it's probably the ultimate commodity since the supply is so rigidly controlled. Every human being, no matter how rich or poor, how smart or stupid, how tightly scheduled or time-squandering, gets just 24 hours of it per day. No exceptions.
The practical outcome of this limitation is that we all have to make choices about how we spend our time, and some people are better at this than others. We all know people who jam their leisure time with meaningful projects and activities and also people who are perfectly satisfied to let a week of evenings go by watching CSI reruns.
The point I want to make today is that a relatively small amount of time spent learning the basics of stock investing, no matter what the style, will give you a great return on your time. Becoming a more informed investor will reward you not only financially, but with increased confidence that will let you broaden your investing horizons.
But the greatest benefit of all is that you would become familiar enough with the elements of the various investing styles that you would be able to do your own research. And doing your own research-not taking any recommendation at face value-can make you a better investor.
Say, for instance, that you are watching a finance show on cable. One of the talking heads is saying that his favorite stock right now is Silver Wheaton (SLW) . He talks about the company's business model, which consists of buying silver rights at a fixed price. This means that the company doesn't do any actual mining, it just buys the right to buy if the mines in the contract produce any silver.
The big secret (well, it's not a secret to me, since I've actually owned SLW in the past, although I don't right now) is that some of the companies that Silver Wheaton contracts with are primarily miners for gold and other metals (like Barrick Gold), and regard silver as almost a waste product. So they're happy to have an infusion of up front money to help with mining expenses in return for getting rid of this "trash" metal. Even companies that specialize in silver mining are happy enough to have the cash that they'll sell their product below market. And the outcome of this bargain is that Silver Wheaton gets its silver at a significant discount to the market price.
If you knew about researching stocks, you would need less than an hour to discover this big open secret. And you would also find out that silver has many more industrial uses than gold, which creates a more consistent demand environment, reducing the volatility of silver versus gold.
You would also find out that Silver Wheaton has recorded a string of seven straight quarters with after-tax profit margins above 70%. When you're not digging in the dirt, costs stay low.
If you were a value-oriented investor, you might look at Silver Wheaton as a company with over $550 million in cash reserves and very little debt. You would see a business that owns the rights to an enormous amount of silver (and growing amounts of gold) at a time when silver is grossly oversold and has fallen 5% year to date. You would see a company that just raised its quarterly dividend to 10 cents per share (annual yield is 1.2%) and sports a trailing P/E ratio of a hair over 20 and a forward P/E just over 15. (Roy Ward, the editor of Cabot Ben Graham Value Letter, just recommended SLW at a price of 39.22, so he must absolutely love it with the stock now at 32! He sees the stock rising to a minimum sell price of 53 within a couple of years.)
If you were a growth investor, you might be interested in SLW as a stock that has appeared in Cabot Top Ten Trader 10 times since March 2008. During the stock's most recent appearance on October 22, 2012, we wrote "Silver Wheaton has 15 long-term purchase agreements (and three contracts for other precious metals) that are expected to allow sales of 28 million silver equivalent ounces, which includes 42,000 ounces of gold. The company's forecast for 2016 has production at about 48 million silver equivalent ounces. As always, Silver Wheaton is just buying the rights to buy silver at a fixed price from proven mines in politically stable countries, and has no ongoing capital expenditures. Thus, while you can regard an investment in Silver Wheaton as a silver investment, the company's extremely low price per ounce gives it a real edge on actual pick-and-shovel miners."
Growth investors would be discouraged by the stock's action since November. After soaring from 25 in late July to 40 in September, SLW built a beautiful flat base under resistance at 41, which allowed patient investors to do a little accumulation. But the move out of that base was down, not up and the stock spent 13 weeks re-basing under resistance at 37. Again, that's a sign that a move is coming, but the market's weakness this week saw to it that the move would be down. With SLW at 32, growth investors will be wary, but might put the stock on a watch list and be ready to nibble at it on any upmove on good volume. Or they might wait for a breakout above that resistance at 37.
Is SLW a buy right now? Well, it all depends on your investing style. Value investors, commodity investors, income investors and turnaround specialists probably think it is. Growth investors don't think so, but they like the fundamentals and see a chart that presents clear buy points. And just about everyone agrees that it's a great story.
At one time or another, Silver Wheaton has been recommended in Cabot Market Letter, Cabot Top Ten Trader, Cabot Ben Graham Value Letter and Dick Davis Investment Digest. And while my point is that there's no substitute for the satisfaction and confidence you get from doing your own stock research, the value of these publications in finding unique stories like Silver Wheaton is incomparable. It's always easier to mine your own gold when someone with real expertise tells you where to dig.
Here's this week's Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
We are a Herd of Independent Minds
Tim's Comment: In 1948, the art critic Harold Rosenberg published an essay titled "The Herd of Independent Minds," in which he deplored the fact that individuals reacted so similarly to external stimuli-whether from books, movies or commercials-that producers of mass media could use psychological tools to manipulate human needs. Rosenberg died in 1978, but I think if he could see today's television commercials, he'd say, "I told you so!" As to the market, there's no conscious entity working to manipulate investors. Nevertheless, our independent minds reliably react as a herd time and again, and it takes a real contrarian-usually following a disciplined system-to do otherwise.
Paul's Comment: It must be frustrating to some people who think of themselves as genuinely independent thinkers to find that there are people who agree with them. But certain modes of thought will always lead thoughtful people to similar conclusions even if all of them get their by themselves. It's best to just go with it and accept that the herd you join by thinking for yourself can actually provide comfort and support. Every different drummer will find people marching with him.
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.
The third part of my interview with Cabot Small-Cap Confidential Editor Tom Garrity runs down the sectors in which he sees the biggest opportunities right now, starting with software and hardware/information technology. Stock discussed: Questcor Pharmaceuticals (QCOR) .
Editor Robin Carpenter of Cabot ETF Investing System writes in this issue about why inverse ETFs (which gain when markets decline and vice versa) aren't a good substitute for shorting an index.
Tim Lutts, editor of Cabot Stock of the Month , uses this issue to answer a letter from a young Cabot Wealth Advisory subscriber about using ETFs to get market exposure with lower risk. Tim also gives the eighth in his series of Stocks To Own Forever. This one is Seaspan (SSW) , a stock that I recommended myself.
Have a great weekend,
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report