Featuring Lutts’ Logic:
10 Big Ideas … and 10 Ways to Profit
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Timing is Everything
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Not long ago, I was having a discussion with some friends about real estate when the focus drifted to Cape Cod housing prices, which had plunged in the 2007-2008 real estate collapse. The consensus among the group was that prices would eventually rebound, and that patient owners and investors would come out OK. And that was no surprise. Most people tend to extrapolate the future from the past … and for most of our lives, real estate prices have gone up.
Then up piped my brother-in-law the geologist, commenting, “10,000 years ago Cape Cod wasn’t there … and in 10,000 years it’ll be gone again.”
He was right of course, but what do you do with that information?
A few days ago, I was talking with a nephew who’s entering his senior year in college, majoring in meteorology. He described how he had been updating a computer program (written in Fortran 77!) simulating the “dirty snowball” that was Earth 600 million years ago.
To most Americans, 10,000 years is a very long time, and 600 million years is so long ago that it seems totally irrelevant … but then you realize that if the study of events past contributes to an understanding of the Earth’s climate changes over the long run, it might actually be useful in understanding the coming changes in climate that some people are so excited about.
The point is, on a day-to-day basis, these things don’t matter at all. But in the long run, they matter a lot. And if you take time now and then to think about the long-term changes going on around you, you can put yourself in position to benefit from them financially, by making the right investments.
I’m not talking about 10,000 years, either. Just a decade or two can do a lot.
Investors in Radio Company of America (RCA) who understood the big wave of radio made a killing in the 1920s.
Investors in Microsoft who foresaw the ascendance of the personal computer laughed all the way to bank in the 1990s.
And investors in Google who saw the power of Internet search combined with advertising got rich in the past decade.
But it wasn’t easy. The most successful investors were not only far-sighted; they were also courageous enough to buy and hold these stocks when they were flying high and more cautious investors warned, “That P/E ratio of 100 means the risk is way too high.”
So today I’m going to mention 10 big trends I see developing, and suggest 10 investments that might benefit from these trends … starting with global trends and narrowing focus from there.
The first trend is global warming … now called climate change, in part because we’ve had a cool wet summer in the Northeast this year. Whether you believe it or not, the fact is there’s real legislation aimed at curtailing fossil fuel emissions from both industry and individuals, and there are companies making money selling the technology to help users comply with this legislation.
I suggest looking at Acorn Energy (ACFN), a stock that’s been recommended in Cabot Small-Cap Confidential. Acorn Energy is a holding company with five portfolio businesses: CoaLogix, DSIT Solutions, GridSense, Coreworx and Comverge, each of which is advancing the cause of a cleaner, safer, stronger U.S. energy industry. (Acorn is up 41% since editor Tom Garrity recommended it in June.)
The second trend is the continuing decline of communism as the #1 enemy of democracy. One result of this is that eventually, we’ll be able to vacation in Cuba, which will be good for the economy of Florida and slightly negative for the economy of Mexico.
I suggest looking at Copa Airlines (CPA), a Panama-based airline that serves the region–and much of South America as well–and has a good growth record. Copa has been recommended in Cabot Top Ten Report.
Replacing communism as a threat to democracy, however–and we’ll call this the third trend–is Islam, and one problem with that is that much of the petroleum we’re so dependent on comes from countries with strong Islamic traditions … which means armed conflict could easily continue.
Sticking with petroleum, the fourth trend is the decline of petroleum supplies after we reach the point of Peak Oil … a point we will only see in retrospect (just as we see recessions). Suffering from this will be petroleum companies that don’t adapt to the changing times. Winning will be the providers of replacement technologies, like wind power and solar power.
I suggest looking at American Superconductor (AMSC) a leading manufacturer of the components used in wind turbines. American Superconductor has been recommended by Cabot Market Letter and Cabot Green Investor.
The fifth trend is the growing economic power of China. I can easily name a dozen strong stocks in China today that are benefiting from this trend. So instead of choosing, I asked Paul Goodwin, editor of Cabot China & Emerging Markets Report, and he answered, “E-House (EJ)–if you develop a middle class, they’re going to want housing.”
Narrowing our focus to the U.S., the sixth trend (and here I plead guilty to more than a little hope) is the “un-spending” trend, the trend to reducing debt and improving personal balance sheets. As Americans spend fewer dollars at Starbucks, one strong stock that’s benefiting is Green Mountain Coffee Roasters (GMCR), whose K-Cups are selling like hotcakes. It’s a favorite stock of Michael Cintolo, editor of Cabot Market Letter.
Seventh, and at the forefront of the news cycle today, is health care reform. When the sound and fury has passed, I expect Americans will have a little more incentive to practice cost-effective preventive health care like eating right and taking supplements. Two strong stocks benefiting from these trends now are Whole Foods Market (WFMI) and supplements king NBTY (NTY), both of which have earned a spot in Cabot Top Ten Report during the past month.
Eighth is the trend toward alternative fuel cars: hybrid, electric, propane, etc. My favorite investment in the area today, a stock recommended by Cabot Green Investor, is Maxwell Technologies (MXWL), which makes ultracapacitors that rapidly store and release electric energy. Regardless of which manufacturers win, it’s a good bet Maxwell will have products in the majority of cars in the decades ahead.
My ninth trend is the decline of newspapers and magazines and print advertising in general and the ascent of online content, especially video. I suggest you look at Rackspace (RAX) the leading enterprise-level hosting company. In short, it houses, configures, powers and protects the computers that make many of your favorite Web sites work. As with Maxwell above, it’s a behind-the-scenes player positioned to benefit from the trend regardless of which players win. And it’s earned a spot in Cabot Top Ten Report.
Tenth, and related to this, is the growing electronic connection between people via a variety of portable devices. Today these are mainly cell-phones, but going forward, anything is possible as cost continues to come down and computing power continues its never-ending march higher. Here I’m going with the well-known Apple (AAPL), whose products merit their higher prices (and higher profit margins) because of their elegant interfaces and user-friendly software. (Apple has earned spot in Cabot Top Ten Report; it’s also found in “250 Highest Ranked Wise Owl Stocks” in Cabot Benjamin Graham Value Letter.”)
This list will change over time, of course, but the main point won’t. If you want to make big money in growth stocks, you’ve got to look ahead, not back. You’ve got to ride the big trends. And you’ve got to have the courage to buy small, less-known stocks that are often expensive by traditional measures.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
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