The Growth Stock Diet

The SNaC Diet to Get Your Portfolio in Shape
Has the Stock Market Bottomed?
A Stock for Today’s Challenging Market Conditions

The SNaC Diet to Get Your Portfolio in Shape

It’s February in New England. (Well, it’s February everywhere, but the month means something entirely different to someone in New England than to someone in, say, Florida.) We’ve had plenty of snow and plenty of reason for non-skiers like me to sit on our sofas in our sweatshirts and watch television.

It’s the month when many New Year’s Resolutions butt heads with the reality principle and people who spent lots of time in the gym in January are now self-medicating their winter blues with pints of Ben & Jerry’s.

It’s also winter for investors, as major indexes continue to either work their way lower or are sitting at what might be the start of a bottom building process.

While there isn’t any substitute for the diet and exercise you promised yourself you’d do six weeks ago, there’s a stock diet that will allow you to make huge progress in your equity portfolio. It’s called the SNaC Diet, and it’s the best way to get your portfolio in shape, even if you can’t seem to make progress in the campaign against your love handles.

SNaC stands for Story, Numbers and Chart, and it’s the method I use to pick growth stocks for the Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor). There’s nothing complicated about it, but it can be very powerful. Just because it’s simple, that doesn’t mean it’s easy to do, any more than the simplicity of “exercise more and eat less” makes that particular prescription easy. Here are the basic principles of what I look for.

Story includes the basic market proposition of a company, including its products, its target consumers, its potential for huge sales growth, its barriers to entry, its competition, its intellectual property, its management and all the other stuff that you can put into words. When someone buttonholes you at a party and tells you about a penny stock they’ve found that just can’t miss … what you will probably hear is the power of a stock’s story at work.

Story is an attractive way to look at stocks because we’re all trained to react to stories. We like books and movies about people who have great ideas and struggle (against apathy, short-sightedness and malevolence) to gain acceptance (and make a pot-load of money). And we’re attracted to the same things in stocks.

But there are lots of stocks with great stories that don’t do a thing. I also want good numbers, which are a record of a company’s success. I look for stocks that have been growing revenues and earnings for a number of quarters, ideally with earnings (profits) rising faster than revenues (sales). I like to see the rate of growth for both categories rising. It’s also nice to have an increasing number of institutional investors and an after-tax profit margin that’s high and rising. And lastly, I want a stock that’s liquid-trading at 400,000 shares a day or more-so subscribers can trade without being worried that the stock will get deep-sixed by one money manager who wants out.

Numbers can be comforting because they give you a sense that more and more consumers and businesses are buying a company’s products, and that management knows how to grow profits.

Charts are where the rubber meets the road in growth stock investing. Some highly technical investors don’t even care what a company’s product is or how much money it’s been making. They think they can tell everything they need just from a stock’s chart. I’m not that confident, but I know that a stock with a rising price and good volume support must be doing something right. When I screen my emerging markets investment universe for candidates to recommend, I’m really looking for stocks whose price is rising. And that’s what’s on a chart.

Charts also tell you about a stock’s momentum-whether its rate of appreciation is rising or falling, whether it’s shaping itself into any of the classic patterns of consolidation, reversal or base-building. I’ve sold stocks that were going up steeply because the chart told me it was a climax top. And I’ve bought stocks that had advanced sharply and then corrected into a tight pattern that indicated steady accumulation.

Of the three components of the SNaC strategy, I guess I like the charts the best. But I can see the value in all three, and I think that all three parts-Story, Numbers and Chart-can help to shift the odds in favor of a stock’s success. The best stocks have great stories, strong numbers and technically attractive charts. In an enterprise that requires you to use every advantage at your disposal to get the odds on your side, it just makes sense to go for the complete package.

Even if you can’t lose the pounds you wanted to, you may be able to use the balanced investing diet of Story, Numbers and Chart to SNaC your way to enough money to buy lots of Ben & Jerry’s.

Has the Stock Market Bottomed?

One quick thought about market bottoms. (This may not make much sense to those of you who’ve never lived anywhere that gets a lot of snow, but bear with me.)

Stock markets go down because people don’t feel like owning stocks. They’re worried a stalled Chinese economy will drag global growth lower. They fret that the Fed will (or won’t) raise rates, which will sour things in the U.S. Whatever the rationalization behind it, they’re afraid they’re going to lose money, and owning stocks makes them so nervous that they can’t sleep at night.

Fair enough.

So people (and institutions) sell stocks and markets go down. And they pick up momentum on the way down as people see prices falling and jump on the selling bandwagon.

They keep on going until the last diehard, the last hold-out, the most stubborn growth investor in the world, finally gives up and sells out. That’s the bottom.

Now, obviously, people still own stocks, because every time someone sold, someone else had to buy. But at the bottom, people are either content to hold stocks because they got them so cheap or they’re so discouraged that they don’t even have the energy to sell. It’s the long, dark night of the investor’s soul, the moment of greatest despair.

It’s also the point at which stocks start to go up. That’s what a bottom is.

Nobody knows when a bottom is reached; that’s something you can only see in the rear-view mirror. But there can be lots of clues that a bottom-building process is taking place.

I like to think about market bottoms like I think about the coming of spring in New England. Spring doesn’t wait for the snow in my front yard to melt and then arrive. Weeks before we get the robins in the back yard and the sap rising in the sugar maples and the potholes appearing in the roads (spring isn’t an unmixed blessing up here), the snowdrops, little white flowers that stand about three inches high, are already pushing their leaves up through the thinning edges of the snowpile. That’s spring on the way, even if the snowplow doesn’t know it.

In the stock market, I don’t think we’re seeing the snowdrops yet. Yes, gold stocks are going up, but that’s a defensive move that’s actually bearish for other sectors. We need to see bargain hunters step in and start sharpshooting beaten-down stocks, and that’s not happening yet. But the snowdrops, although they may get buried a time or two by additional snowfall, won’t give up.

The moment of greatest discouragement with the snow, slush, grey skies and frigid winds of winter is precisely when spring begins.

That’s something you might want to keep in mind if you’re thinking about subscribing to the Cabot Global Stocks Explorer (or one of our other advisories) but want to wait until the market turns up. Being ready, with a large cash position on the sideline and a watch list with promising names, is the prime requisite for success in the new bull market. And if you’re among the people who get Cabot’s message when our market timing indicators turn positive, you’ll be that much ahead of the people who still only see the snow. Click here to learn more.

A Stock for Today’s Challenging Conditions

My stock pick today is tailor-made for challenging market conditions. It’s Seaspan (SSW), a Chinese containership owner and operator that leases its ships on long-term contracts. The company currently has 85 vessels in operation, but expects its fleet to expand to 118 by the end of 2017.

Seaspan is really an outsourcing company at heart. Shippers lease ships and operators, avoiding the expense of owning their own fleet. Seaspan builds ships, hires crews, maintains and operates those ships, all on long-term contracts that insulate shippers (and Seaspan) from fluctuations in shipping rates. New ships are typically engaged for periods of up to seven years before they’re even launched.

SSW has been in a long-term downtrend, with a high at 25 in 2013, 24 in 2014 and 21 in 2015, and a real selloff to as low as 14 last month. Worries about a slowing Chinese (and global) economy have raised concerns about profitability and many investors don’t want to own any Chinese company.

I have had my Cabot Global Stocks Explorer subscribers in SSW for longer than any other stock for one reason. SSW pays an annual dividend that yields north of 9%. And right now, with SSW trading just under 16, the stock is trading at a very reasonable 15 P/E ratio.

Having a substantial income flow can be a powerful solace to investors when the broad market is having a conniption fit. And that’s especially true when the company you’re investing in has revenue transparency of four years or more.

There’s more than one way to skin a bear, and Cabot’s analysts have plenty of solutions for the problem of where to put your money in nasty weather.

And while I’m on the subject of where to put your money, I’d like to extend an invitation to the Cabot Investors Conference, an annual affair that will be held this year from August 10 to August 12 right here in Salem, Massachusetts.

This is the fourth year of the Conference, and the feedback we’ve received from attendees over the years tells us that it’s a supremely useful and enjoyable way to learn a ton about the art and craft of equity investing (and even a few bonds!) while meeting with Cabot’s crew of analysts. Our analysts have years of experience with every phase of investing, including judging the state of the markets, finding outstanding stocks, building a portfolio and staying in sync with the market. Topics every year cover growth investing, value investing, options, small-caps, income stocks and diversifying across asset classes. We also emphasize the importance of planning, in advance, for whatever the market throws at you.

The sessions at the Cabot Investors Conference are always lively, with lots of questions from attendees and interaction among presenters. And for those whose spouses aren’t as committed to the craft of investing, Salem in August offers a wealth of history, shopping, dining and entertainment opportunities.

Chief Analyst of Cabot Global Stocks Explorer
and Editor of Cabot Wealth Advisory

Timothy Lutts

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