The Cold Investor Buys Out of Favor
The Hot Investor Buys Trends
The Orthodontics Revolution
The Hot Investor buys trends. He likes what's working now. He's impatient. Some observers might even say his money burns a hole in his pocket.
The Cold Investor, on the other hand, buys what's out of favor and waits patiently. He knows that values will win out eventually. Some observers might even call him stubborn.
Well, today I'm giving you two choices, and they come with a paradox, which will become apparent as you read.
In this corner is Tom Garrity, editor of Cabot Small-Cap Confidential , who is traditionally a Cold Investor.
Tom recommends one stock per month to his subscribers, but only after he's researched it thoroughly. Traditionally, Tom's picks take some time to work out, but the long-term profits are very rewarding. For example, last week Tom recommended selling Questcor Pharmaceuticals ( QCOR ) .
He'd recommended Questcor back in July 2010 when it was trading at 9.38. Last week, he recommended that subscribers sell at 40, for a profit of 326%, not bad for two years. A typical move for Tom.
But last week also brought something atypical. Apple announced it was buying AuthenTec (AUTH) , a company that specializes in security technology (like fingerprint readers) for roughly $350 million, and the stock went crazy as a result, soaring from $5 a share to more than $8!
Tom had recommended AuthenTec just three weeks before down at $4.50, which meant his readers were looking at a profit of 87%. After just three weeks!
And that's not all!
Tom's June recommendation (in a consumer products industry) is up 50% since he recommended it.
And Tom's May recommendation (in the same consumer products industry) is up 60%!
In short, Tom is a Cold Investor who's suddenly become hot!
On the other hand ….
In this corner, we have Paul Goodwin, editor of Cabot China & Emerging Markets Report.
Paul recommends roughly two stocks a month. His system isn't fundamentally based like Tom's because Paul is a Hot Investor. He trusts charts. He likes to own what's going up, and if it's not going up, he won't own it.
This approach, based on the momentum strategy at the core of Cabot Market Letter, has served Paul well for years. In fact, he was the top performer, according to Hulbert, for every five-year period ending from 2008 through 2010, a feat due above all to the strength of Chinese stocks.
In 2006, his portfolio was up 78.6%.
In 2007, it was up 74.1%.
And in 2009, it was up 33.9%.
Well, Chinese stocks, as you may have noticed, have cooled.
In recent months-alright, years-Paul has been a Hot Investor whose universe has grown cold.
He's working as hard as ever, but those Chinese stocks just haven't been cooperating, even though the Chinese economy is still growing fast. To my mind, it's only a matter of time before they reward Hot Investors again.
So here's your choice.
Do you go with the Cold Investor who's got a hot hand today and hope it continues?
Or do you go with the Hot Investor whose hand has grown cold, knowing that when Chinese stocks finally get going again, they're likely to make up lost ground fast?
Moving on, there's an old phrase used to express the state of the market when all the news is rosy, all the investors are bullish, and hundreds of stocks are hitting new highs. It's "Priced to Perfection" and it's code for, "Time to Think About Selling."
Well, I don't know a similar phrase to describe the opposite condition, so I'm suggesting one today: "Priced to Perdition." It means all the news is terrible, all the investors are bearish, and very few stocks are hitting new highs.
We're not exactly there today, but we were definitely there back in late 2008 (2009 was great fun), and I think we were there again in May and June of this year, when Europe was on the brink of disaster.
Since then, stocks have strengthened-though they've thrown in enough sharp drops along the way to keep investors fearful-and as a result, I'm pretty bullish about the months ahead.
And I'm most bullish, as always, about companies that are growing sales and earnings rapidly, that have revolutionary new technologies and services, and whose charts tell me they're becoming increasingly well regarded by growing numbers of investors.
One company that fills the bill today is Align Technology ( ALGN ) , a California company that's revolutionized the orthodontics business.
The core of Align's business is a computer system that enables the creation of customized clear plastic 3-D "aligners" that do the same job as ugly metal braces. These aligners are removable by the user, to enable brushing, flossing and eating corn-on-the-cob. They're effective; the average user goes through a set of 24 over the course of a year that progressively shifts his teeth into the proper position. And of course, they're patented, which means that everyone who wants to avoid the problems of metal braces has to pay Align Technologies.
The company is well managed; it's grown revenues every year of the past decade, and it's grown earnings every year since 2008. In the most recent quarter, revenues grew 21% to $146 million, earnings soared 70% to $0.34 per share. And the after-tax profit margin was a robust 19.6%.
I like the whole idea, and if you like it too, I recommend you take a no-risk trial subscription to Cabot Top Ten Trader , which recently recommended the stock and which will keep you up to date with ongoing advice about it.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory