One Hot Stock

The Saga of Curt Schilling

Hubris

One Hot Stock

Seeing as we’re located in Salem, Massachusetts, and our beloved Boston Red Sox are currently battling to win the World Series, it’s time for a recap of the Saga of Curt Schilling—followed by an investment lesson and a hot stock pick.

Curt Schilling joined the Red Sox in late 2003, and in 2004, the team was hot, looking for the World Series win that had eluded it since 1918.

Schilling tore a tendon sheath in his ankle while pitching against the Los Angeles Angels in the American League Division Series.

Surgery repaired it—sort of.

Pitching in Game 6 of the American League Championship Series against archrivals the New York Yankees, the sutures opened, Schilling’s white sock was bloodied, and the Red Sox won the game.

Schilling threw that sock away in the Yankee Stadium clubhouse, and more work was done on his ankle.

Then in Game 2 of the World Series against the St. Louis Cardinals, Schilling’s sock again became soaked with blood, but he still managed to pitch seven strong innings—and in four games, the Red Sox swept the St. Louis Cardinals.

Curt Schillings white sockThat sock ended up in the Baseball Hall of Fame (though Schilling retained ownership).

Schilling pitched a few more years, but age and injuries took their toll, and he retired—still a hero to Boston—in March 2009. His career record: a 216 wins, 146 losses, 3.46 ERA and 3,116 strikeouts, 15th-most in MLB history.

Schilling earned more than $114 million over an 18-year career in major league baseball (before taxes). And more from other sources.

But he didn’t retire to Florida and go fishing. No, since 2006, Schilling had been following his second passion, computer gaming. He first named his company Green Monster Games, and hired developers to build a MMORPG (massive multiplayer online role-playing game). He renamed the company 38 Studios the next year.

In 2010, Schilling was shopping for support from state governments, and Rhode Island “won,” loaning 38 Studios $75 million in exchange for a promise to bring 450 jobs to the state.

In 2011, the company launched a single-player game, Kingdoms of Amalur, which enjoyed moderate success. But the company was still working on its MMORPG, Copernicus, and was burning through cash fast.

In 2012, 38 Studios could no longer make payroll. Its loan payment to Rhode Island bounced. The company was bankrupt. And $50 million of his own money that Schilling had invested in the company was gone.

And the sock? It had been listed as collateral for a loan. So the sock was auctioned off earlier this year, sold to an anonymous bidder for $92,613.

The reason I bring up Curt Schilling today is not to focus on baseball, but to focus on hubris, the ancient Greek concept of extreme pride or arrogance—the opposite of humility.

When Schilling hung up his baseball glove, he was on top of the world, a god to many fans in the Boston community. And as he worked to find funding for his game company, there’s little doubt that his celebrity worked in his favor. Doors were open to him that would have been closed to most of us. The due diligence that would have preceded most state loans of $75 million was less than rigorous, as public employees were blinded by the prospect of having a big gaming company led by one of baseball’s greatest pitchers in their state.

So to some extent, the problem was that state employees were blinded by Schilling’s celebrity. But equally important is the fact that Schilling had over-reached—that with no experience creating even simple games, he had tackled the difficult business of creating a big MMORPG.

As the bible says (Book of Proverbs, 16:18) “Pride goeth before a fall.” And Schilling fell.

And this is relevant today because YOU may be feeling pretty good about some of your investment successes recently. I know I am. But I also know that a big reason for my success this year (and yours too) has been the market. And I know that somewhere ahead, there’s a downtrend that’s quite capable of making me (and you) look as foolish as Schilling looked after losing his company.

So I’m working very hard today to remind myself of all my past investing mistakes, and reminding myself how easy it might be to make them again.

And then I’m trying to avoid doing so.

For example:

One investing temptation today is NQ Mobile (NQ), a Chinese software company that offers all kinds of solutions: mobile security, privacy, productivity, personalized cloud, anti-theft, family protection, etc. NQ is a small company, but the fundamentals showed it growing at a good clip, and the stock had a nice chart until last Thursday, when short-selling mouthpiece Muddy Waters publicly denounced the company as fraud. The company denied everything, of course, but the stock didn’t listen. It fell nearly 50% (from 23 to 12), to close at its 200-day moving average.

Now, in the real world, when someone holds a 50% off sale, people come running. And some people did run to pick up NQ at 12, before trading was halted. But when trading resumed on Friday, the stock fell to 10, teaching those people a lesson, one you’ve probably heard before.

“Never try to catch a falling knife.”

Sure, somewhere, NQ will bottom. But the people who thought 12 was the bottom were proved wrong. And I see no reason to try to pick the bottom. The odds are lousy.

Furthermore, I really don’t care whether Muddy Waters is right or wrong about NQ. As I’ve said before, it’s not about being right, it’s about making money.

So, for my money, the best investments today remain stocks that are in uptrends, especially if the company behind the stock is growing rapidly AND if the company (and industry) is ripe for improved perceptions by both the public at large and investors in particular.

Take SunPower (SPWR), for example.

You can find hotter solar power socks, and you can find younger solar power stocks, but you won’t find a solar power stock that has a better combination of growth and stability.

SunPower has been in business since 1985. It’s located in San Jose, California, not China. And it boasts the largest installed base of residential and commercial solar power systems, with more than 100,000 residential systems installed.

The company has been profitable every year since 2005, which is a sign of good management. After-tax profit margins in the three most recent quarters have been 3.2, 4.3% and 10.9%. And analysts recently raised their earnings projections for both 2013 and 2014.

So, you could just jump in and buy SPWR here. But I don’t recommend it. Because to tell the truth, the stock (like most solar stocks) looks a little extended here. So the odds are good for a pause, if not a modest retreat.

Instead, I suggest you take a look at Cabot Top Ten Trader, which every Monday will present you with 10 strong stocks that ARE at good buy points. Plus, when you buy those, we’ll tell you when to sell and take profits, too!

For details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher, Cabot Wealth Advisory

Comments