You Call That a Bottom?
Write It on a Post-It Note
A Stock That Just Might Be Bottoming
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You Call That A Bottom?
I’ve had more than 10 years of living every working day with the Cabot growth investing philosophy, and I can rattle it off pretty well. Let winners run. Cut losers short. Stay in step with trend of the market. Look for stocks with good stories, good numbers and charts.
After a while, it starts to seem obvious, even though I know it’s not. I talk to too many investors who pick and manage their stocks with a mix of emotion, astrology, whim and caprice to believe that anything is obvious.
Mostly I’ve cured myself of bad investing habits and I run my portfolio (and the Cabot China and Emerging Markets Report’s portfolio) on sound principles. And the results are good.
But the tendency I have the hardest time with is this: I’m tempted by the idea of finding a stock at the bottom of a correction.
I’ve given up on the idea of recognizing a bottom in the market. Market bottoms are idiosyncratic, sometimes bumping along for weeks or months, sometimes forming sharp Vs and other times W-shaped patterns. As I always say, the only people who consistently sell at the top and buy at the bottom are liars.
Write It On a Post-It Note
Occasionally, I see a stock that I think has hit a low point, and sometimes I tell one of my Cabot colleagues about it. And if the colleague is Tim Lutts, he responds to assertions that a stock may have a bottom in the same way he responds to most predictions. He tells me to write it down on a Post-It note and stick it up some place. (He’s done this with stock predictions, along with the question of when someone at Cabot might buy a car made in China, when the snow in front of our building will melt, etc.)
Here’s one such note I wrote after telling Tim that I thought the stock of Petrobras (PBR), the Brazilian oil giant, had hit bottom.
I made this call in the middle of March 2015, as I was reviewing the investing universe for Cabot China & Emerging Markets Report, looking for likely candidates for inclusion in the portfolio.
As you can see from this chart, PBR wasn’t exactly thriving at the time. Petrobras has enormous oil reserves, but in addition to the low oil prices that have dogged all energy stocks, it’s a state-run entity that has been plagued by bad management.
I noticed that PBR, which traded at 21 in early September 2014, had been in a long skid, but found support at 6 four times in December, January and February. Then came a disastrous March that scuttled PBR all the way to below 5, another sizable haircut from its December–February trading range.
And, just as if I actually knew what I was talking about, PBR bounced the very next day, rallying to above 10 by May, before losing steam in a couple of drops to under 8.
It’s a dangerous thing to be right about something on the basis of no more than intuition, a little technical insight and coincidence. If I ever let myself believe that I can find stocks ready to double within two months, I’ll be on my way to the poorhouse.
That’s because the market is always happy to hand you something that you don’t deserve, in exactly the same way a slot machine is programmed to reward you for doing the same thing over and over.
I didn’t recommend PBR to my subscribers. I didn’t even mention it to them. Under Tim’s guidance, I did exactly the right thing. I wrote a note about it and enjoyed the thrill of being right. And that’s what you should do with any investment idea you may have that’s based on anything but a cold-blooded assessment of a stock’s story, numbers and chart.
Do anything you want with your sun signs, your grandchildren’s birthdays and your wife’s initials (even if they do spell a stock symbol), as long as you don’t put money at risk.
Nobody can consistently call a stock’s bottom, not even me.
A Stock That Just Might Be Bottoming
My stock pick today is a continuation of the same “calling the bottom” theme. I’ve always been fascinated by the company Silver Wheaton (SLW), mostly because I like their business plan.
Silver Wheaton is a silver stock, but not a silver miner. The company buys the rights to purchase actual silver in the future. But because it buys these futures from gold miners (who consider silver a waste product) and aspiring silver miners who need the financing for their operations, it can buy at a discount. (The company has moved into gold purchase agreements in a small way, but silver is still its main business.)
The company’s business plan makes sense to me, and it has been consistently profitable despite the long-term decline in the prices of both silver and gold. Estimates of 2015 earnings are for 64 cents per share, down from 2014’s 74 cents per share. 2016 estimates are up to 84 cents.
But nothing, not a good business plan, not a 1.5% dividend and not predictions of future appreciation for any precious metal can make up for a chart that looks like this.
There are always gold and silver bugs around who will forecast a huge rally in precious metals. And, since I have an admitted weakness for stocks that look to me like they may have bottomed, you’d think that SLW would appeal to me here.
But I don’t see any signs, technical or economic, that precious metals are anywhere near putting in a bottom. SLW hasn’t found support anywhere since its round of sideways trading with support at 19 back in April.
So if you’re tempted by SLW, or any other stock that’s been through a big decline, thinking it might be at a bottom, just keep this chart of SLW in mind. And write your big idea on a Post-It note. It’s the right way to handle such impulses.
Sincerely,
Paul Goodwin,
Chief Analyst, Cabot China and Emerging Markets Report
