Top Ten All-Star Stocks
If you were a fly on the wall in the Cabot offices on Monday mornings, and spent some time watching the Cabot analysts, you might think that we are a group of nose-to-the-grindstone workaholics who just hack away at our computers. There’s very little fooling around, weekend story swapping or analysis of how the Patriots performed. At least until around Noon.
That’s because Monday mornings are devoted to turning out Cabot Top Ten Trader, our weekly advisory that details the strongest stocks of the previous week.
These are not mayfly stocks, the ones that jump 30% in one week and drop 40% in the next. The 10 stocks picked each week are solid corporate citizens that generally have a history of revenue and earnings growth, trade enough volume to be liquid, have prices high enough that they can attract institutional owners and—most importantly—are in strong price uptrends in both the short term and longterm.
Each company selected gets a brief writeup of its business proposition and why it’s doing well right now. The writeup also includes a history of the company’s revenue and earnings trends, a daily and weekly price/volume chart, technical analysis of the chart, a suggested buy range and a suggested stop-loss. All in all, it’s 10 pages with ten writeups, plus an intro page and a page that reviews the status of all previous recommendations.
But personally, after ten years of contributing reviews to Cabot Top Ten Trader, I think any company that’s selected should be damned proud of itself. Inclusion in Top Ten means that the company is doing something right, and investors are recognizing it. When I write my contributions to Top Ten, I always look at how many times a stock has been featured before, and when. Because while making the grade once is kind of an honor, being selected for inclusion many times is about as close to the Good Housekeeping Seal of Approval as you can get in the growth stock world. Being a Top Ten All-Star means that a company has a solid record of growth in a profitable sector, and that management knows how to ride the waves of market cycles to keep growth going and the stock price rising.
Today, I want to tell you about the three companies that are the record holders for number of appearances in Cabot Top Ten Trader. After that, if you’re still curious, just send me an email and I’ll send you the entire Top Ten All-Stars list.
The Top Three: Movies, Coffee, Surgical Robots
#1 The top of the Top Ten All-Stars is Netflix (NFLX), which has been featured 33 times since its first appearance on February 17, 2003. NFLX is now trading at north of 300, but on the day it made its Top Ten debut, it closed at a split-adjusted 7.45!
The story on Netflix combines many of the classic elements of the best growth stocks. The company had a unique business model—mailing DVDs of movies to subscribers via U.S. mail—that appeared almost foolhardy. After all, Blockbuster owned the movie rental business and used its dominance to enforce its strict time limits, charging penalties for late returns. Netflix allowed subscribers to keep movies as long as they wanted, without penalties, and streamlined the reservation and delivery process. It was a David and Goliath contest all the way, with small, nimble Netflix eventually bringing Blockbuster to its knees.
Netflix had (and has) superior leadership in the person of CEO Reed Hastings, a man who followed up his great idea of delivery by mail with a second great idea: streaming content via the Internet. NFLX made its most recent appearance in Cabot Top Ten Trader on April 29, 2013.
#2 The second place spot on the list of Top Ten All-Stars is a tie, but I’ll feature Intuitive Surgical (ISRG) first because it made the first of its 27 appearances on August 2, 2004, three years earlier than its partner.
Intuitive Surgical is essentially a one-trick pony, but it’s a very good trick. The company’s Da Vinci surgical robot transformed the practice of prostate surgery, allowing surgeons unprecedented 3D imaging and precise instrument control to achieve a superior outcome.
The da Vinci surgical systems were expensive, and their appetite for disposable instruments and parts guaranteed continuing income for Intuitive Surgical from every system sold. After the initial wave of sales for prostate surgeries, Intuitive Surgical kept growing by increasing the variety of surgeries for which its devices were approved.
Intuitive Surgical was never able to reinvent itself as Netflix did, but it didn’t have to. On the day it was first written up, ISRGclosed at 21.2 (it hasn’t split since then), then topped out at 585 on April 18, 2012. It was last featured in Cabot Top Ten Trader in January 2012.
#2 Tied for second place with Intuitive Surgical, Green Mountain Coffee Roasters (GMCR) has also been featured in Cabot Top Ten Trader 27 times since it made its first appearance on August 27, 2007 when it was trading at a split-adjusted 7.74.
Green Mountain Coffee Roasters is a two-act drama, the first coming from this regional bean roaster’s relentless expansion, both organic and via M&A, into a national distribution giant. But retail is a tough business, and the company could only grow revenue (and, more importantly, margins) a certain amount from just pushing beans.
The breakthrough for Green Mountain was its 2006 acquisition of the Keurig brand of single-serve coffee pods. The company’s high-risk strategy of selling Keurig brewers at near cost eventually paid off big. Every machine sold had the potential to keep producing follow-on income, and Keurig pods were a much higher-margin way to sell coffee.
GMCR was a huge mover, ultimately hitting 112 in September 2011 before concerns about the possible expiration of the Keurig patents undercut it. It has even rebounded nicely from its July 2012 bottom at 17, roaring back to 89 just last month. The stock made its most recent appearance in Top Ten just last month. So those are the top three All-Stars of Cabot Top Ten Trader. They illustrate what it takes to be a true leader among growth stocks: You need strong leadership, the ability to shift gears, a product that addresses mass markets and competent execution.
There is no Cabot Top Ten Trader portfolio as such. This advisory is aimed at finding ideas for growth investors to develop and investigate on their own.
But Top Ten provides all the tools needed to build your own portfolio of the strongest stocks in the market.
I’d be happy to send you a free issue so you can see for yourself what those strongest stocks look like. Just reply to this email requesting a sample issue. I’d also like to make you another offer. Just send me an email and I’ll send you an annotated list of all 10 of the Cabot Top Ten Trader All-Stars, the 10 stocks that have rung the bell 20 or more times over the years. For growth stocks, it’s like having the biggest shelf of trophies around.
A Chinese All-Star Stock: Baidu
For my stock pick today, I’m going to use one spoiler from the All-Star list. The company is Baidu (BIDU), a Chinese Internet search company that has made 21 appearances in Cabot Top Ten Trader since January 2007.
Baidu is the dominant online search engine for the Chinese Internet. The company has earned its dominance by understanding the Chinese language better than any of its Western competitors, which gave users better results.
Baidu has survived challenges from Google, which lost out in the Chinese market only partly because of Baidu’s better search results. Google also refused to comply with the Chinese government’s requirements for limiting access to certain topics and withdrew temporarily from the market.
Baidu has been revivified by another challenge to its search dominance, this time from Qihoo 360, a mobile device security software company that has leveraged the popularity of its Web browser into a significant share of the mobile search market. The challenge from Qihoo has pushed Baidu into acquiring a large Chinese online app store, a move that will increase its mobile footprint.
Baidu has always been hugely profitable, but it took the challenge from Qihoo 360 to get the company in high gear in the mobile arena. And mobile is the fastest growing segment of the Chinese telecom/Internet business.
BIDU made a huge move in July, ripping from below 90 to over 140 in recent trading, and has tightened up for a few weeks. It may take another good quarterly earnings report to power the next move, but BIDU continues to be a potential powerhouse.
Sincerely,
Paul Goodwin
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory
