What is the Cabot Philosophy?
A Comeback Stock
Stock Market Analysis Video
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I’ve been answering reader questions from our survey for the last couple of weeks and today I have one more to share with you.
Question: What is the Cabot philosophy?
Answer: I really liked this question and have been toying with how to answer it for a few weeks. I think it could have several different answers, so I’m not sure if I’m picking the “right” one, but to me, the Cabot investment philosophy is our growth investing rules that we’ve fine-tuned over the last 40 years and that are employed by our flagship newsletter, Cabot Market Letter (and our other growth newsletters). So I’m going to take a piece of education information from our website, written by the Cabot Market Letter Editor Michael Cintolo himself, because I couldn’t say it better myself:
1. Invest in Fast-Growing Companies
You’ll usually find them in today’s fast-growing industries, where revolutionary new technologies and services are being created. As you study the stocks in these growth industries, you should favor lesser-known stocks that have yet to reach the point of peak perception. Frequently these will be smaller stocks, where growth potential is greater!
2. Buy Stocks with Strong RP Lines
Relative performance (RP) studies-which chart how well stocks are performing against the broad market-are a superb way to identify successful companies and to avoid problem companies. You should buy stocks that are consistently outperforming the market. This is a good indication that they are under accumulation, week after week, month after month, and that the companies are succeeding. The best investing tips come from the performance of the stocks themselves. So ignore hot tips!
3. Use Market Timing to Guide Your Investing
Be cautious when the broad market is against you and aggressive when it’s with you. Don’t underestimate the power of the market to move stocks, both up and down. When Cabot’s market timing indicators are signaling a bull market, don’t delay. The trend is up, so stocks will be going up! Buy your favorite stocks and hang on as long as the ride is profitable.
4. Once You’ve Invested in a Stock, Be Patient
Recognize that time is your friend. Frequently stocks don’t go up as fast as you might want them to. But if you can develop a persistent and tolerant attitude coupled with plenty of patience, you’ll have a great advantage. We call this STAYING POWER! (The need for patience does not apply to losses. Read Rule 6.)
5. Diversify Your Portfolio
For the Cabot Market Letter’s Model Portfolio, 12 stocks provide plenty of diversification. Smaller investors can do well with as few as five stocks, but you should never have all your eggs in one basket.
6. Cut Losses Short
This is the key to ensuring that you retain enough capital to stay in the game. No matter how hard you try, you are going to select stocks that go against you as soon as you buy them. Get rid of these stocks quickly! Never let your loss of your original money invested exceed 20% in a bull market or 15% in a bear market, based on the closing price of the stock. This is a most important rule, and yet we repeatedly hear from new subscribers who ignore it, hold on and suffer far greater losses. They learn the value of this rule the hard way.
7. Sell a Winning Stock When it Loses its Positive Momentum
This is a clear indication that other investors are selling too. And a lot of them know more than you do. So don’t wait for the company to tell you about the bad news. Sell first and read the bad news later. You can usually tolerate RP line corrections of as long as eight weeks but seldom more than 13 weeks before concluding that the stock’s momentum has turned negative. When these limits are exceeded, sell the stock without regret.
8. Let Your Profits Run
The power of compound growth can swell your account dramatically-if you are patient. Long-term investments make more money than short-term investments. So learn to develop staying power. Let your profits run and run and run. This is how big money is made in the market. Not by taking 10% and 20% profits but by thinking big-in terms of 100%, 200% and larger profits.
9. As Time Passes, Buy More Shares of Your Best-Performing Stocks
Add a modest number of shares to your winners from time to time, trying to do this during corrections in the stock, not after the stock has posted a major run-up. Called “averaging up,” this is a great way to reinforce your investments in your best stocks.
10. Be An Optimist
In our nearly four decades of publishing the Cabot Market Letter, we’ve seen many ups and downs for both the market and our country. But after every tough event our dynamic country and economy have eventually rebounded. So no matter how bleak the situation, always stay optimistic because our country and stock market will give you some dazzling opportunities!
If growth investing isn’t your thing, Cabot does offer nine other newsletters that cover a wide range of investment strategies, from value investing to Green investing and emerging markets investing to small-cap stocks.
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** For the past two difficult years, Cabot socked the S&P 500 by a whopping 82%. (Market was down 26%.)
** For the past five years, Cabot stomped the market by a hefty 60%. (Market was down 8%.)
** For the past 10 years, Cabot dominated the market by a staggering 113%! (Market was down 26%)
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This week, a stock came to my attention that we’ve written about many times here before, but that fell out of favor a few months ago. The company is Green Mountain Coffee Roasters (GMCR), maker of the Keurig coffee brewing system and single-serve K-cups.
Green Mountain operates under the classic razor/razor blade model: It sells the Keurig coffee brewing system at cost and makes the majority of its profits from the pods (containing hot or iced coffee or tea and cocoa) that fit into the machine. And the pods are far cheaper than buying a cup of coffee at Starbucks, or even our New England favorite: Dunkin’ Donuts. (We even have a Keurig in the Cabot office!)
The company has worked hard to build its brand strength, which has kept it ahead of the competition. It has also increased earnings at least 33% in each of the last nine quarters and logged triple-digit gains on five occasions during that time.
More recently, Green Mountain reported a fiscal Q3 profit of 19 cents a share. This was up 58% from a year ago and a penny above Wall Street estimates. The company’s sales climbed 64% to $311.5 million, also coming in above forecasts. And management raised 2011 earnings estimates by 15% to 20%.
GMCR hit new highs not too long after the stock market bottomed in March 2009 and was a huge winner until March of this year. The stock has been advancing nicely in recent weeks after suffering a steep correction in the spring. And GMCR had a strong move after its stellar earnings report. We’re still not diving into the market with both feet, but taking a small position here could work out well.
Green Mountain Coffee Roasters was recently recommended in Cabot Top Ten Weekly. To learn more about GMCR and other top stocks, click here!
In this week’s stock market analysis video, Cabot China & Emerging Markets Editor Paul Goodwin says that it’s hard to argue with a week that has produced advances in the market, but that it’s also been an indecisive week with both good and bad news released. Stocks discussed include Affymax (AFFY), Kraton Performance Polymers (KRA), NetApp (NTAP) and Citrix Systems (CTXS).
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.
Cabot Wealth Advisory 8/2/10 – A Stock for the New Economy
On Monday, Chloe Lutts discussed her take on her father’s (Tim Lutts) recent discussion of his Ford 8N tractor. Chloe wrote about the future of the U.S. economy and why she thinks it will be supported by innovation. She also recommended a stock for the new economy. Featured stock: Red Hat (RHT).
Cabot Wealth Advisory 8/5/10 – The Four Factors That Determine Your Results
On Thursday, Michael Cintolo discussed the four factors that determine your portfolio’s performance and why they are so important. Mike lamented the lack of new leadership in the stock market and discussed an emerging markets exchange-traded fund. Featured ETF: MSCI Emerging Markets Index (EEM).
Until next time,
Editor of Cabot Wealth Advisory