Featuring Lutts’ Logic:
A Good Time for a Vacation
India
A Strong Education Stock
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Yesterday afternoon, my wife and I returned from India, where we celebrated a big birthday (hers) with a two-week vacation. The experience was absolutely marvelous, rich in warmth and beauty, yet at the same time colored by the substantial economic challenges that face the country of 1.1 billion people. We’re very happy to have done it. And I’m happy that I didn’t miss the start of the new bull market! In fact, while I was gone the Dow dropped another 10%, the S&P 500 lost 14% and the Nasdaq plunged 16%. Happily, all our Cabot growth-oriented letters have been recommending a heavy cash orientation for many months so this continued erosion has brought little pain.
So today I’ll start with a wrap-up of our India trip and finish with an investment idea. As usual, you can read the parts you like.
Delhi has the worst traffic I’ve ever encountered, with roads clogged by cars, bicycles, scooters, pedestrians, cows, pigs, dogs, camels, buses--and the ubiquitous three-wheeled auto-rickshaws. Elsewhere in the country, these nimble little vehicles are still powered by gasoline, but Delhi, in an attempt to reduce smog, has mandated that all run on natural gas. The rules of the road matter little, with vehicles regularly crossing lines--even the center line--to improve their position. One cab driver told us you need three things to drive in Delhi, good brakes, a good horn and good luck.
The national railway system--which we used three times to transit between cities--moves 14 million passengers per day; their low fares are subsidized by high freight tariffs. For us, the trains provided stress-free travel, though at times their levels of cleanliness were challenging.
Only eight people per thousand in India are rich enough to own a car. And the roads are terrible. Even without the challenges posed by seasonal freeze-thaw cycles, there are substantial potholes, animals and miscellaneous debris that make road travel slow. So people overload their vehicles. A jeep might hold a dozen people, while it’s common to see a motorcycle or scooter carrying a family of five, including a sari-clad mother with babe-in-arm. And one man’s leg-powered bicycle-wagon might deliver six to 10 children to school.
In the countryside, it’s common to see barefoot women gathering and stacking dried cow patties for fuel and pumping water from the village well. Obesity is rare.
America’s poor, by contrast, appear rich! As one Indian acquaintance remarked, “In America, poor people sleep in their cars.”
Bureaucracy is the norm. When in doubt, India puts a middle-aged man behind a desk to stamp your papers. A friend in Delhi told us it takes three months to get the permits required to install a gas stove in an apartment.
As a result, corruption is rampant. If you really want something done, greasing the palms of officials, from politicians to policemen, helps. The word “baksheesh,” with meanings ranging from charity to tipping to bribery, is Persian in origin and the Indians have mastered it.
Speaking of begging, we encountered plenty, but none obnoxious. The best practitioners offered something in return. Most amusing was the boy, perhaps eight years old, at the railway station in Bharatpur, who wanted to shine our shoes. The fact that my wife was wearing thin-strapped sandals and I canvas shoes made no difference. Wielding his well-worn shoe brush--and no polish--he smiled and promised us a fine shoeshine.
And that brings me to my biggest and most lasting impression of India, the fact that people smiled, not just with their mouths but also with their eyes. One friend interpreted this ever-pleasant demeanor as a sign of happiness. I prefer to call it kindness, and for a traveler, there’s nothing like kindness to make the journey in an unfamiliar land more enjoyable.
Credit this happiness/kindness to the Hindu religion, if you will. It’s the third-largest religion in the world, after Christianity and Islam, and of approximately one billion adherents, 900 million live in India. When you’re focused on reincarnation, dharma and improving your karma, the inconveniences of everyday living are easily bearable.
India is improving fast; it’s the second-fastest growing large economy in the world (after China). GDP grew at 9.1% in 2008. Mobile phones are ubiquitous. Within the country, we flew on clean new planes operated by Kingfisher Air and Jet Airways. And we enjoyed flat-screen TVs in several hotels. But there are gross incongruities. For example, one night in Jaipur we wanted to watch a movie in our room. The clerk at the front desk presented us a list of movies, we chose three, and retired to our room to await delivery. Soon after, a call informed us the wait might be an hour. It was actually a little more. And when the movies arrived, only one would play in the room’s DVD player. The other two were apparently pirated copies of originals, one of which was intended for the U.S. market (region 1) and one for the Indonesian market (region 3). (India, along with Russia and most of Africa, is region 5. Maybe someday I’ll do a feature on this whole crazy DVD region scheme.)
There are wealthy people in India. A year ago there were 54 billionaires in the country; now there are 27. But poverty is widespread and basic sanitation is still a dream for millions. A fourth of the population earns less than the government-specified poverty threshold of 40 cents per day.
One thing the government does for these people is keep prices of commodities low so basics like rice, wheat and gasoline are affordable. At the same time, however, it puts high tariffs on imports, so that you see scarcely few imported cars in India, and imported alcohol is notoriously expensive.
Education rates are improving. Schooling is free--even compulsory. But access in rural areas is difficult, and when children can be used productively in the fields, it’s hard to keep them in school. The literacy rate is just 68% ... and substantially worse for women than for men. India is the largest democracy in the world. If you can’t read, how do you vote?
The food we found was universally delicious. Prices were a bargain. And portions, even by American standards, were ample. For vegetarians, the country is heaven; with the appropriate spices, even the dullest vegetable is a taste treat. My wife loved the breads, while I loved the yogurts, both for their taste and their cooling effect on the hottest dishes.
As in China, I was impressed by the use of muscle power for tasks where Americans traditionally use machines. Much weaving and sewing is done by hand. Much small-time farming is still done by hand. At the airport in Jaipur, I watched as baggage vans on the tarmac were maneuvered by hand ... a group effort. And at a marble cutting and polishing factory we visited in Udaipur, we were astonished to see six men do the work that a forklift would do in the U.S. ... and without hard hats, steel-toed shoes or safety glasses.
Finally, Indians are mad about cricket, which seems an odd game to Americans. But the fact is, it’s played in most former English colonies, while our American football is played in far fewer places.
Summing up, the trip was a great success, partially because India is such a different world, and the people are so kind, and partly because of our planning. My strategy for this trip was to start with a bang in fast-paced Delhi and then move progressively to smaller and more relaxing venues ... and it worked.
The highlight, perhaps--and here I’ll make my only specific recommendation--was two nights spent at Khem Villas outside Ranthambore National Park. Accommodating fewer than 30 guests in cottages, tents and a main house, Khem Villas provided a comfortable respite from the cities. Its vegetarian menu was terrific. Our cottage bordered a pond complete with a six-foot crocodile. And on our morning jeep safari, we got some excellent pictures of a tiger!
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As for the market, it stinks. Still. Every expectation I’ve had in recent months that the downtrend would end has been wrong. Happily, we don’t provide advice based on my expectations, instead using proven investing systems that allow subscribers to earn great money in the long run.
Our value-based systems simply ride through it, knowing that what’s undervalued (and you know there are plenty of stocks in this category today) will eventually be fairly valued again.
And our growth-based systems have been recommending cash, pure and simple, because the major trends are still down.
But there’s a part of me that’s hooked on momentum investing. It’s the art/science that my father Carlton loved and mastered, and to me, it’s the system that often provides the best indication of which stocks might lead the market in the next upturn.
Consider, for example, Strayer Education (STRA), a stock that earned a spot in Cabot Top Ten Report back on November 3 when it was trading at 226. I know that looks like a high price, but you shouldn’t let it stop you. Price is irrelevant. It has nothing to do with value or growth or momentum. All it means is that if you buy the stock, you buy fewer shares than you normally would. So here’s what we wrote about Strayer.
“If you’re looking for companies that benefit in a difficult economic environment, consider Strayer Education. The company offers undergraduate and graduate degrees at 62 campuses in Alabama, Delaware, Florida, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. Its 44,564 students are mainly working adults pursuing their first college degree, and the stock is strong now because last week’s third quarter report was excellent. The company continues to demonstrate accelerating revenue growth, the result of both expansion and increased demand. And management announced the company has received initial approval to operate in Ohio, West Virginia and Utah. The company has a very long trend of earnings growth going back to the early 1990s and we see no reason for it to end.”
Moving on, the Report gave a Suggested Buy Range of 205-220, a range determined by careful chart analysis. And what’s happened since then? Well, just last week, at the market’s low, the stock dipped to undercut both its 25-day and 50-day moving averages to touch 202 ... and then quickly rebounded. Today it hit 225. Clearly, there are committed buyers supporting this stock, and if the rotten economy sends more adults back to school, Strayer could be a big winner.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
Editor’s Note: Cabot Top Ten Report provides subscribers with capsule descriptions and recommendations of the 10 strongest stocks in the market, 50 times a year (this is one of the off weeks). There’s no fundamental bias to the selections; the action of the stocks themselves determines which stocks earn an appearance. Our editors then analyze the companies to determine why the stocks are strong and why they might or might not stay strong in the future. The result: readers get early notice of some of the market’s biggest winners, like Hansen Natural, Crocs and First Solar. To get started today, simply click the link below.
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