Cabot’s 2010 Winning Stocks

Featuring Lutts’ Logic:

March Madness: A Logical View?

Cabot’s Winning Stocks

Today’s Tip: Cimarex Energy

As most Americans are aware, March is the time of year when the best college basketball teams battle it out to determine who’s king of the hill.  The contest, which lasts roughly three weeks, is famous for its ability to eat into the productivity of American enterprise, as sports fans spend time researching the teams participating, bet on office pools and watch the games.

Some of my employees at Cabot are involved and I have no quibble with that.

What I do want to address today is this question: Why is this training ground for major league sports allowed to exist–nay, thrive–in the tax-free environment of academia?

To try to answer the question, let’s start at the beginning.

In 1905, while playing football for Harvard, president Theodore Roosevelt’s son Ted had his nose broken in a game against Yale.  Mrs. Roosevelt, we can assume, was none too happy about it.  More important, Teddy Jr.’s broken nose was symptomatic of the growing roughness in the game; in the 1905 season, 18 college football players died!  So Roosevelt gathered together representatives of the leading colleges, and succeeded in getting a number of rules passed that reduced violence and rewarded skill more than brute force.

That, without question, was good.

Also good is the way the group, which became the NCAA (National Collegiate Athletic Association) in 1910, now organizes, coordinates and regulates the athletic programs of U.S. and Canadian colleges and universities, so there can be fair inter-collegiate competition.

But with an annual budget of more than $710 million (primarily from television revenues), the NCAA is more than a source of referees, it’s a big business.  And it’s been a key factor in making sports a big business INSIDE our educational institutions.

The upside of this is that athletic ability can be a meal ticket to a good education–and I truly do appreciate this–for those students who take advantage of it.  The downside is that the athletic money machine can distract an institution (and its non-athletic students) from their focus on education.
(In Europe, by contrast, sports and colleges are minimally connected.)

The most common knock on the college athletic system is that its participants often fail to graduate; they either jump to the pros or drop out, failing as both athletes and scholars.

On average, teams from last year’s NCAA tournament graduated just 43% of their players.  That includes six teams with graduation rates under 20% and two others in single digits.  Note: Players who jumped to the pros without graduating are left out of the equation.

This year, No. 1 seed Kentucky graduated just 31% of its athletes, and only 18% of its black athletes.

Admittedly, there HAS been progress in graduation rates in recent years, but only to satisfy the requirements of the NCAA.  Athletic success means money, and to many participants, from coaches to college presidents, money talks.

In any event, that topic is well discussed in other forums already, and I have no desire to take it further.

My question is this: What would happen if the television money were truly taken out of college sports (mainly basketball and football) and the best players then followed the money into traditional minor leagues, such as exist under Major League Baseball?

The downside is that some athletes wouldn’t get an education … if you can call what they get now an education.

But the upside is that the IRS would have a new source of revenue–these minor league institutions and their employees/players.

And the colleges, forced to compete harder on the academic front, would refocus on what really matters.  Some would shrink, but I think the product as a whole would improve.  In fact, the effects would trickle down to the secondary level as well, where athletic prowess is encouraged because of its value in college.

When I wrote about this topic two years ago, the most common comment from readers was the complaint that their state/local tax dollars had been used to build expensive arenas for college sports teams.  Specific mention was made of Portland’s Rose Garden and San Diego’s Qualcomm Stadium.  One reader wrote, “My alma mater used support from the state government to build a new arena for the basketball team. How could they justify taking $200 million of taxpayer money to build a tax-exempt arena for 20 games a year? I know my company would not spend the money in this fashion, when they have stockholders to answer to.”

Obviously, sports arenas are highly visible big-ticket items.  What I’m wondering about is the less visible stuff; the tax-exempt status of these school athletic programs actually costs us money in lost federal revenue, though we can’t see it.  And then there are the very real costs of the academic programs, for which so many student-athletes receive scholarships.  Without the artificially high “demand” for these academic programs from student-athletes, might the price of a college education fall … or at least stop rising?

The skyrocketing cost of college tuitions has been well documented in recent decades.  Less clear is exactly what factors are most to blame.

I suggest the NCAA is part of it, and I welcome your comments.

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As to the stock market, after a spectacular four-week advance, the market began a well-deserved correction last week.  I think it is likely to go further, and I recommend that you take advantage of normal pullbacks in good stocks to buy at temporarily low prices … because I think the market will be higher in the months ahead, and here’s why.

First, and most important, all major indexes are in positive uptrends, and market breadth is exceedingly healthy.

Second, while investors who’ve enjoyed profits over the past year are smiling, they are still nervous about the future.  Furthermore, the man on the street still has little interest in investing.

Finally, leading growth stocks like Green Mountain Coffee Roasters (GMCR), NetLogic (NETL), Netflix (NFLX) and Cree Inc. (CREE) look terrific.

As usual, my analysis gives no weight to unemployment levels, war, oil prices, the value of the dollar, the popularity of our president and the state of our nation’s health care system.  If I did weight those things, I’d be as pessimistic as many Americans about our future, and my company would not have guided thousands of readers to great profits over the past year.

Just since the beginning of January, in fact:

Cabot Market Letter has earned 15% in Intuitive Surgical (ISRG).

Cabot China & Emerging Markets Report has earned 39% in Baidu (BIDU).

Cabot Top Ten Report has earned 35% in Ford Motor (F).

Cabot Green Investor has earned 24% in Cree Inc. (CREE).

Cabot Stock of the Month Report has earned 27% in CNinsure (CISG).

Cabot Small Cap Confidential has earned 26% in QuikLogic (QUIK).

Cabot Benjamin Graham Value Letter has earned 31% in Deckers Outdoor (DECK).

Admittedly, there have been losses, too.  But success comes from keeping the losses small while letting the winners get big.  If you’re not a regular subscriber to one of these letters, now is a great time to start.

Finally, here’s today’s tip, and unknown stock with big growth potential.  

It’s Cimarex Energy (XEC), and here’s what editor Micheal Cintolo wrote about it in Cabot Top Ten Report three weeks ago.

“Cimarex Energy is a Denver-based explorer/producer that’s both traditional and modern at the same time. It’s traditional because the company believes in “drill-bit driven growth,” drilling and developing its own wells rather than growing via acquisition. But it’s very modern in its reliance on its staff of geoscientists to assess the potential reserve size, geologic and mechanical risks and costs. Cimarex operates in the Permian Basin, Mid-Continent and Gulf Coast regions, and as of the end of 2009, had proven reserves of 1.53 trillion cubic feet equivalent (up from 1.34 Tcfe at the end of 2008), of which 80% was natural gas. The company pays a nice dividend (forward yield 0.4%). The company’s quarterly report of February 17 beat Street estimates, and improved production guidance kept investors’ enthusiasm high. Cimarex looks like a conservative company that gives investors’ a way to bet on future gains in energy prices.”

Back then, when the stock was trading at 61, Mike told subscribers that a smart buying range was 56-60.  Since then, it’s topped 62, and now it’s just pulled back to 57, where it’s kissed its uptrending 50-day moving average.  I don’t think it will hit 56.  I think it’s a fabulous buy right here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

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