Even in today’s choppy market, there are great growth stocks out there. In a minute, I’ll tell you how to find them—and how to avoid the big losses that can plague the portfolio of any growth investor. But first, let’s talk about this downright spooky market.
Three Cures for a Scary Market
Halloween is supposed to be scary, and there seems to be a steady supply of people who want to be scared. Or, at least they want to put fake spider webs on their bushes, tombstones on their lawns and orange lights on their houses. Horror movies run all month on TV, and fresh movie shockers pop up at theaters.
But in spite of all the ghoulishness, there’s not really much about Halloween that’s frightening. When a six-year-old sugar addict shows up on your porch mumbling “Trick or Treat” the correct response isn’t fear, it’s, “Nice costume!”
But I’m a growth stock investor, and growth investors always have plenty to be apprehensive about. If you really wanted to scare a growth investor, you should show up on his porch dressed like a bear market. That will haunt his dreams for days!
Just as an aside, Salem, Massachusetts, where Cabot is located, takes great pride in being the Witch City, a place where you can get your palm read, your aura adjusted and all your Wiccan supplies gathered on any downtown block. It’s a strong brand, and the city takes care of it, including a statue of Samantha (Bewitched) smack in the middle of downtown. (See below) And in October, the town becomes a magnet for black-clad people of every persuasion, from tattooed Goths to elaborately costumed corpses and from cartoon characters to movie monsters. Black is always correct, of course.
A quick trip into town for dinner this week confirmed that the craziness is heating up, although it was nothing like the Festival of Weirdness that is Salem on Halloween. (If you join the throng on the Night itself, you might even spot Tim Lutts, our fearless leader, taking in the scene in his customary Wookie outfit.)
But like I said, while Halloween is a wonderful fall diversion, there’s really not much about it that scares growth stock investors. The market, on the other hand, is doing the job nicely. A quick glance at the S&P 500 will tell the story. After a couple of months on the roller coaster, the S&P went through a gut-clenching two-day slip in late June, followed by a strong bull run that led to a series of new all-time highs in July and August. But that September 9 air pocket wiped the smiles off growth investors’ faces, and the twitchy action since has kept them on edge.
The S&P 500 is now trading at the same levels it occupied in the middle of July, and it’s worried about the same pack of demons that have bedeviled it for months: The Fed, Brexit, the election (which is so upsetting that Dunkin’ Donuts blamed it for lowered donut sales!) and the strength/weakness of China’s economy.
So, how does a growth investor deal with this scary season in the market? It’s simple, but not easy.
First, you need to do an exorcism on your portfolio, purging the zombie stocks (those that have been in there for a long time and have either done nothing or have big losses) and setting mental stops on your laggards. I know it’s hard to finally give up and sell stocks that have losses, but the discipline will do you good. (And if you’re thinking/hoping that they will come back, remind yourself that your chances of big gains are much better if you put your money into a stock with positive momentum.)
Second, you need to cut back on your buying while the intermediate-term trend of the market is down (which you can see because the S&P 500 is below its 25- and 50-day moving averages). The momentum of the market is one of the strongest external influences on a stock’s performance, and waiting until the market is going up will greatly improve your odds of finding a winner.
Third, you need to build a watch list of great growth stocks so you can be ready to move when the market gives the green light. There are lots of ways to find great growth stocks, but my personal favorite (and the one I use to find the stocks that I recommend in Cabot Global Stocks Explorer) is just to look at charts.
When I see a chart that’s showing strong performance, I start to drill down to see what the excitement is about. Is the positive chart the result of a great earnings report? Did the company have other good news such as an acquisition, a positive result in clinical drug trials or a contract win? You can also check the company’s fundamentals, looking for a run of double-digit revenue and earnings growth. But the chart is the tipoff for me. It’s like the smoke that sends the ranger looking for the fire.
(And if you want to know what a great chart looks like, check out this daily chart for NetEase (NTES), a Chinese online game company that’s been on a tear.)
There’s an even easier way to find great growth stocks, of course, and that’s by subscribing to one of Cabot’s growth advisories, like Cabot Growth Investor or Cabot Top Ten Trader. All of them (including mine) will not only give you the story, numbers and chart on strong stocks, but they will tell you when the scary time in the market is over. It’s a very good thing to know.
For more information about Cabot Growth Investor, click here.
For more information about Cabot Top Ten Trader, click here.
Fortune Cookie
“Democracy is always an unfinished experiment, testing the capacity of each generation to live freedom nobly.”
-George Weigel
Tim’s comment: Trust Paul to find a quote that not only takes the high road but also—oh so subtly—acknowledges the swamp of politics that surrounds us today. I trust that somehow, we will pass the test.
Paul’s comment: I was specifically looking for a political quotation for this week’s issue, and liked this one. But I was a little astonished to see how many philosophers and political thinkers have been genuinely skeptical about the long-term prospects for democracy. These skeptics see greed, self-interest, ignorance, mob rule, class envy and the corrupting effects of power as the likely stumbling blocks that will bring democracy low. All we can do is be sure to vote and trust the wisdom of the founding fathers to steer us clear of the shoals.
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