Tapering and the Stock Market
Best Revolutionary Stocks
Qihoo 360 Technology
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Last week brought the following email.
“I’m a new subscriber to Cabot Stock of the Month and have to say THANKS! It’s making a huge difference in my portfolio.
“One question for you, how should we approach the tapering of QE later this year? What are your projections for how it will impact the markets? Is it already “built in”, or will we experience some significant shock? How to prepare for this eventuality?”
J.C., Walsenburg, Colorado
My answer:
Forget about it. The market discounts everything. This means that it is constantly reflecting investors’ latest perceptions about the effect of tapering, plus investors’ perceptions about the Affordable Care Act, the costs of our ongoing military actions, the War on Drugs, the war against obesity, immigration reform, interest rates, mortgage default rates, unemployment, gun control, the trade deficit, corporate earnings at every public company and more. Everything!
Knowing that, your best course when it comes to investing is to listen to the market. If its actions agree with your perceptions on an issue, great. But if its actions disagree, don’t argue. The market is influenced by so many disparate factors that to focus excessively on any one of them is often a mistake.
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Also in the mail came a question about my recommendation last week of Pandora (P) as a Revolutionary Stock in the fast-growing cloud-based music subscription business. To recap, I argued that as Pandora was the market leader ($472 million in revenues), was growing fast (55% revenue growth in the second quarter), and had a strong chart to boot, it was the best investment in the industry and would likely leave Apple (the current online music leader) in the dust.
But J.M. of Santa Monica, California, wrote,
“Seems to me the analysis should go deeper into comparing Pandora v. Spotify rather than Apple. Who has the better library, audio quality, user experience, marketing savvy, executive gravitas, subscriber loyalty, etc ?”
My answer:
Remember the Betamax versus VHS debate? Experts who weighed all the factors agreed that Betamax was better. But VHS won the race. In short, it’s not enough to decide which is the better service; the question is, which is the better investment?
Once again, the chart tells all. Pandora’s investors, as a whole, have already considered all the relevant factors, and their collective judgment is far more important than my judgment. Furthermore, Spotify is not publicly traded in the U.S. yet. Songza, which I use, is traded in Norway, but its value traded per day is just one-seventeenth of Pandora’s. When/if Spotify comes public and trades for a while, my judgment may change, but until then, Pandora is the stock to own in this revolutionary industry.
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Lastly, one more related letter, which arrived after I first announced the upcoming 10 revolutionary stocks.
“I just had to tell you, I think all of your Wealth Advisories are a good read, but this one tops them all. I am often talking about Cabot to my co-workers who do investing like myself. Some have even got on board with Cabot. But I have a question. As a Cabot Market Letter and Cabot Stock of the Month subscriber, are these 10 revolutionary stocks that you profile in the Cabot Wealth Advisor (that is a free letter from Cabot) ones that we as “paid subscribers” should be adding to our portfolios? Or are these going to be more of a “food for thought” kind of thing? I bought Tesla back when you first recommended it and I’m on board at $27.32 per share. Needless to say, you couldn’t slap the smile from my face!!! As of now, I have been shadowing what you and Mike have done with the Market Letter and Stock of the Month, and keeping my position size, and cash % as close as I can to yours. And that will not change any time soon. But with the upcoming revolutionary stocks, should I move some more cash into my trading account for these upcoming “recommendations”?
Please advise.
J.B., Marquette, Michigan
Good questions. The main difference between stocks recommended in this free Cabot Wealth Advisory and in our paid publications is that stocks recommended here may never be mentioned again. So if you buy one, you’re on your own. Contrarily, if you buy a stock recommended in any paid Cabot publication, we will always tell you when to sell, and why, and keep you updated on the stock’s action every week along the way. As to these 10 revolutionary stocks, they all have great growth prospects, and it’s fun to write about things that are changing our lives, whether they’re serious, like LinkedIn, or pleasurable, like online music. But the construction of your own portfolio requires balancing risk and reward, and because these revolutionary stocks have the potential to make big moves in both directions, each investor has the responsibility to decide for himself how much risk he wants to take on.
Speaking of risk? How about a Chinese software company? That’s today’s Revolutionary Stock!
Qihoo 360 Technology (QIHU) is a late entrant to the Chinese browser/search business, but it’s gaining market share fast and earnings are expected to boom in the quarters ahead. Here’s some of what Paul Goodwin, editor of Cabot China & Emerging Markets Report, wrote in June.
“Qihoo 360 is still young (incorporated in 2005) and small (annual sales of $370 million). But its history provides a great illustration of how success can show up at your back door while you’re out by the front door waiting for a package. Qihoo 360’s front door, the signature product that they expected to be the main revenue source, was its anti-virus software for mobile devices … Qihoo has penetration of between 80% and 90% of the security market.
“But the success that has come in the back door for Qihoo 360 is based on the company’s very popular open mobile browsers, 360 Safe Browser and 360 Speed Browser. At the end of Q1, these browsers had 332 million monthly active users (up from 172 million in January 2011) and a penetration rate of 70% in China. Qihoo monetized its browsers’ popularity with the familiar model of display ads and over 280,000 paying users of its game platform, up from 139,000 two years ago.
“In August 2012, Qihoo inaugurated its own mobile search service on its browsers, and shocked the world by suddenly owning about 10% of the mobile search traffic in China. The suspicion at the time was that Qihoo was stealing market share from Baidu, but subsequent analysis showed that the jump in usage came primarily from former Google users.
“Wherever the new users came from, the new search business allowed Qihoo to begin offering sales of search term-based ads to businesses, very much on the Google model…Annual revenue in 2012 was $329 million, and analysts expect 2013 revenue to come in around $588 million…Qihoo 360 is a big story and 2013 is likely to see substantial revenue increases from its new search-term service.”
Technically, the chart is encouraging. After coming public in March 2011, QIHU entered into a long bowl formation, bottoming at 14 in 2012 and breaking out to new highs in May of this year. The stock is up 80% since then, reflecting growing sponsorship by both traders and investors. So the future is bright. But short-term risk is substantial, with the 50-day moving average down at 52 and the company’s earnings announcement out soon (though the date is unknown.)
With the potential to be China’s leading browser/search platform, QIHU is tempting, but it’s not for beginners.
If you’d feel comfortable with a little less risk and a little more handholding, I recommend my own service Cabot Stock of the Month Report here.The weeks ahead will bring six more revolutionary stocks like Qihu, and I look forward to presenting them to you.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Editor of Cabot Stock of the Month
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