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Extraordinary CEOs

Last week, I introduced this year’s “10 Stocks to Buy & Hold Forever” series, in which I ask all the Cabot analysts to nominate stocks.

10 Stocks to Buy & Hold Forever

Extraordinary CEOs

Zoe’s Kitchen (ZOES)

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Last week, I introduced this year’s “10 Stocks to Buy & Hold Forever” series, in which I ask all the Cabot analysts to nominate stocks and I then narrow the list down to 10 stocks and write about them.

The goal, remember, is not to identify stocks that can give you a decent long-term return, like Johnson & Johnson (JNJ) and DuPont (DD).

The goal is to identify stocks that can make you rich!

I want to identify the next Amazon (AMZN), the next Apple (AAPL), the next Google (GOOG) and the next Tesla Motors (TSLA).

To recap, the key attributes I look for are these:

1. A product, service or business model that is revolutionary.

2. A mass market.

3. A company that’s still small enough to grow rapidly.

4. A company that is not respected-perhaps not even known-by the majority of investors.

5. And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving. This is important because perceptions are always at least as important as reality.

Also, I keep in mind the words of Thomas Phelps, who wrote “Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable.”

These days, when information flows so rapidly that we risk drowning in it, I like Mr. Phelps’ reminder that the unknown can be even more important. It reminds me to think long and hard about where a company might be years down the road, far beyond the vision of today’s analysts.

Now, there is one more factor that can be very important, and one of my readers was kind enough to remind me of it this way.

Timothy,

You overlooked the most important factor, and that is the truly extraordinary CEO: Bill Gates, Steve Jobs, Jeff Bezos, Zuckerberg, Buffett, and the person you should have thought of to at least give some passing credit is Elon Musk. Shame on you! Please read “The Outsiders” for a list of CEOs that crushed GE’s Jack Welch. So you don’t have to have any of the factors that you mentioned so long as you have a business that throws off a lot of free cash flow and a CEO who knows how to maximize shareholder return. I’m sure you’re aware that many CEOs are not aligned with shareholder interests. Your focus should be on the CEO! Stephen H. Norfolk, Virginia

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All that Stephen writes is true, but the focus of my “10 Stocks to Buy & Hold Forever” is on identifying companies that are still so small that they can grow very fast, and it’s rare that a CEO of one of those companies is viewed as “extraordinary.” In fact, when I recommended Amazon back in January 1998, the company was still years from profitability. Many analysts called Jeff Bezos crazy, and predicted that the company would be crushed by Barnes and Noble.

Similarly, when I recommended Tesla Motors back in December 2011 at 29, the company was still far from profitable, and doubts about the company’s viability were rampant. Very few people recognized Elon Musk’s brilliance then.

So while it is fine to invest in “extraordinary” managers, doing so will typically limit your opportunities to buy the stocks of high-potential companies early.

Which brings me to today’s stock, No. 1 in the Series, “10 Stocks to Buy & Hold Forever.”

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Best Stock to Buy and Hold Forever: Zoes Kitchen (ZOES)

We’re all familiar with the success stories of McDonald’s, YUM Brands (KFC, Pizza Hut and Taco Bell) and Chipotle Mexican Grill. Restaurants can be great long-term investments because once a successful formula is established, growth is simply a matter of opening new restaurants, first across America and then throughout the world.

Mike Cintolo, chief analyst of Cabot Market Letter and Cabot Top Ten Trader, uncovered Zoes, which has 121 restaurants in 15 states.

The restaurant was founded by John Cassimus, who gave it his mother’s name and created a menu combining his Greek heritage and the Southern hospitality of Alabama where he was raised. That’s the formula that Zoes Kitchen has parlayed into an impressive growth streak; in the past three years, revenues have grown 55%, 59% and 46%.

I wish I could say I’ve eaten in a Zoes Kitchen, but I haven’t. As the company has grown out of Alabama, it’s gotten as far west as Arizona, and as far north as Pennsylvania, but it hasn’t gotten to Massachusetts. And I haven’t seen one in my travels-yet.

In any event, revenues were $116 million in 2013, which is impressive. But the company hasn’t turned a profit in recent years; it’s been too busy expanding.

Analysts are projecting that the company will lose two cents in 2014 and then make a profit of four cents per share in 2015, and that sounds fine to me. But what matters more to me, especially when it comes to gauging the long-term possibilities, are two other factors.

First is the food. America’s obese diabetic population needs more healthy foods, like those served by Zoes Kitchen, with its menu focused on Mediterranean foods. Admittedly, Zoes is not as cheap as McDonald’s-a spinach rollup costs $7.69 and a hummus and salad plate costs $6.99-but it’s still affordable for a large segment of the population.

Second is the chart. ZOES began trading on April 11 of this year, just one month ago, so most investors don’t even know about it! Here’s the chart.

ZOES came public at 15, but the lowest it traded on the first day was 23.73. Four days later, it hit a high of 31.43, and since then it’s traded mainly in a range between 26 and 28.

In short, the stock is stabilizing, which is good, especially considering the market’s recent intolerance of growth stocks. The stock’s relative performance line reveals that it’s subtly outperforming the market.

Ideally, what happens next is that more and more people become aware of Zoes Kitchen, as it opens new restaurants, and more and more investors become aware of ZOES (the stock) at the same time.

In any case, there’s a ton of potential buyers who could push the stock higher as they learn about the company. And I don’t think there’s much downside, given the company’s proven ability to expand and the probability that actual earnings are just over the horizon.

So that’s the first of my “10 Stocks to Buy & Hold Forever.” If you’re inspired to buy some ZOES now, I understand. Just note that trading volume in the stock has been waning since the IPO, and the lower it gets, the greater the potential for volatility, especially if a large number of trading orders appear overnight.

So beware of placing orders when markets aren’t open, because you can’t be sure what price you’ll get.

If you want stock selections that are a little more timely-meaning they’re stocks that are going up now-I suggest you take a look at my Cabot Stock of the Month, which focuses on one stock per month. It’s quite affordable, too.

Yours in pursuit of wisdom and wealth,

Timothy Lutts

Chief Analyst, Cabot Stock of the Month

And Publisher, Cabot Wealth Advisory

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Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.