What is your investment process and criteria for emerging markets investments?
Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor) is an aggressive growth advisory that advises subscribers about opportunities in the stocks of emerging markets companies, and companies that are benefiting from the growth of developing economies.
The Report recommends only stocks that trade on U.S. exchanges as American Depositary Receipts (ADRs), which are dollar-denominated stock equivalents. This avoids any currency risk and gives investors the protection of knowing that the listed companies have met U.S. accounting and reporting requirements.
Stocks are screened for price, liquidity, growth of revenues and earnings and momentum. The ideal stock is one that presents an attractive combination of story, numbers and chart, what I call the SNaC approach (Story, Numbers and Chart).
Story is the market proposition of the company, its products, customer base and its potential for huge growth.
Numbers includes the fundamental results of financial reports and projections of future growth.
Chart includes the price performance of the stock, its performance relative to the broader market, and the volume trends of its advances and declines.
I consider a stock that presents an attractive package of story, numbers and chart to be a much better investment that one that satisfies only one or two of these criteria.
Who is your target audience?
The target audience for the advisory is any investor who is looking to gain exposure to the rapid growth of companies in emerging markets. The typical subscriber is an individual investor, but the Report is also read by many investment professionals such as brokers and money managers.
The ideal emerging markets investor needs an aggressive stance (to take advantage of rallies), a high risk tolerance (to weather the volatility of these markets) and discipline (to cut losses short and book profits when markets grow threatening).
What do you believe gives you an edge over other investment experts?
I believe my main advantage is that I follow the Cabot formula for growth investing: 1) Cut losses short. 2) Let winners run. 3) Invest with the general trend of the market.
Emerging markets are more volatile than developed markets, so loss control is particularly important. By using strict sell disciplines for stocks that don’t perform as expected, the portfolio avoids the big losses that can sap long-term performance.
Conversely, by holding stocks that are making gains until they show definite signs of price deterioration, the portfolio takes advantage of a tendency in stocks to continue far past the level that investors expect.
Lastly, using a time-tested market timing indicator to gauge the general trend of the market allows me to be aggressive in up markets and take profits when the tide turns against me.
What are your short-term (3-6 months) and longer-term views (1-2 years) of the markets?
As a matter of policy, I avoid any attempt to predict the future actions of markets. I don’t think I can do it and I don’t think anyone else can either. The Cabot Global Stocks Explorer is run strictly on the basis of information that can be known for sure, which means what’s on the record.
While I keep close track of the growth of emerging markets countries like China, India and Brazil, I don’t invest a dime on the strength of predictions. I’m very optimistic that the robust growth of developing countries will ensure outstanding performance of those markets, however, it’s the short- and medium-term movements that make or break my portfolio’s performance.
What sectors do you think offer the most opportunities to profit today?
Cabot Global Stocks Explorer is a pure stock-picking service. If I wind up with an overweight to a country or a sector, it’s a result of individual stock decisions, not any sector or country bets. I buy stocks, not sectors or countries.
Where can I find the performance of Cabot Global Stocks Explorer stocks?
Every issue of Cabot Global Stocks Explorer includes a Previously Recommended Stocks table. The table shows each stock’s rating, buy price, buy date, current price and profit. If you’re interested in previous holdings, you can find all the information for as far back as you care to go by looking at previous issues in the online archives.
Does Cabot Global Stocks Explorer provide company performance stats like long-term and short-term growth rates, P/E, EPS, etc.?
Cabot Global Stocks Explorer doesn’t usually provide company performance stats because our method of picking stocks is not essentially fundamental.
(On the other hand, our value advisory, Cabot Benjamin Graham Value Investor, does provide this type of information because it uses an investment method based on projecting a company’s future earnings and finding stocks that trade at the most attractive discount to those earnings. When the editor runs his proprietary algorithms through a computer, he gets a definitive rating that tells him unequivocally what the best value stocks are. )
Rather, Cabot Global Stocks Explorer uses what we call a SNaC approach, which looks for the best combination of Story (market proposition, potential revenue base, intellectual capital, management, barriers to entry, etc.), Numbers (history of revenue and earnings growth, profit margins, institutional support, debt, etc.) and Chart (momentum, volume trends and other technical analysis).
Frankly, the process of putting those three factors together to come up with one new stock recommendation involves much research and analysis, but may also include intuition, hunches and informed speculation.
Thus, while I wouldn’t turn down a stock with a low P/E ratio, I wouldn’t be especially attracted to one if that were all it had going for it. Historically, I have turned the portfolio over about three times a year, which means there isn’t enough time for the logic of “future earnings at a discount” to assert its power.
Most of your stocks have recently been Chinese—what about the other emerging markets?
Concentrating in China (to the exclusion of other countries) isn’t our intention. We have no conscious biases or allocations that involve country, sector or industry. We’re always looking at the entire universe of emerging market stocks that trade as ADRs on U.S. exchanges. Many of the most attractive stocks have come from China, but we have also found high potential stocks in India (HDB), Brazil (GFA), Chile (SQM), Argentina (GGAL) and Russia (YNDX).