This Goldilocks Market
A Leading Provider of Network Security Technology
My youngest child, a year out of college, has been looking for a new job, and he recently mentioned that he was hoping that his latest employer would give him a good recommendation.
I told him, however, that it’s entirely likely that the employer may only verify dates of employment, and say nothing positive or negative, because it’s the safest course, legally.
In the course of discussing this (in particular, the way lawyers can impede free commerce), he reminded me of a column I’d written a few years ago describing a number of factors that hampered progress in this country.
So I dug it out. It ran here in August 2012, and I’ve duplicated it below, adding commentary that shows that we’ve actually made some impressive progress!
Eight Stupid Rules That Are a Drag on the U.S. Economy
1. The American Rule – Americans litigate far more often than the residents of other countries. In fact, the share of our economy spent on litigation is at least twice that of Germany, France, England and Northern Ireland. Why? Because our system of risks and rewards is screwed up. In every other country in the world, the loser pays at least part of the other party’s legal fees; this rule inhibits the filling of nuisance suits with little merit and helps encourage law-abiding behavior. In the U.S., however, the American Rule encourages the filing of nuisance suits that clog the court system, primarily rewarding the lawyers. That’s one reason the U.S. has more lawyers per capita than any other country; there’s a lawyer for every 265 Americans. And because the people who “run” the country in Washington are generally lawyers, there’s little incentive to change.
2. The Continuing Federal Prohibition of Marijuana – Nearly a century ago, we learned that prohibiting the production, trade and consumption of goods that the public wanted diverted public money to a vast criminal black market that supplied that want-and gave us the likes of Al Capone, Machine Gun Kelly and Dutch Schultz (real name Arthur Flegenheimer). Today we have the same situation with marijuana. Polls show that 56% of Americans support legalizing and regulating cannabis (the tax revenue would be substantial) and 80% support medical marijuana. Yet an estimated $30 billion a year continues to go to law enforcement to fight the drug war and in the process perpetuates lawlessness on both sides of our Mexican border.
Progress: Oregon and Washington legalized marijuana a few months after I wrote this. To date, 23 states and the District of Columbia have legalized marijuana in some way.
3. The U.S. Postal Service Monopoly – Thanks to the Internet, the U.S. Postal Service has become a slow-motion train wreck. In response, the U.S.P.S. is cutting costs-by reducing service to its customers (!)-but doing nothing to address the main problem. And Congress just kicks the can down the road. A radical solution would be to free the U.S.P.S. from its outdated mission and to allow free-market competition so we all get better service.
Progress: Not much. The U.S.P.S. has been cutting costs diligently, but cutting service too, and no private enterprise is allowed to compete for 1st class mail … yet.
4. Taxi Medallions – The conceit that city fathers know best how many cabs is the right number ignores the wisdom of the free market and perpetuates a market that makes medallions so expensive only professional companies can afford them … which raises costs for customers.
Progress: How foolish of me not to mention Uber back in 2012, when it was small but growing rapidly. Today Uber, Lyft and other companies provide a fine alternative to taxis, and the medallion system is slowly crumbling as both taxi companies and municipal governments debate how to respond.
5. Liquor Licenses – Ditto
Progress: Precious little.
6. Immigration Laws – Forget about the problems at the Mexican border. Ignore the Miami/Cuba issue. The real tragedy of our immigration laws is that we continue to force visitors who graduate from our excellent colleges to return to their home countries! This brain drain-particularly in math and science-weakens American competitiveness while strengthening other countries. Even Bill Gates couldn’t get Washington to act, though signs are that change will be achieved eventually.
Progress: One big surprise last year was the agreement to reestablish diplomatic relations with Cuba. Good move! But not much is happening on immigration in general, and even less is happening with regard to retaining foreign students with math and science degrees.
7. Ethanol and CAFE laws – The requirement that ethanol be added to gasoline has made corn-and everything made from corn-more expensive, while contributing to the global food crisis. And the labyrinthine Corporate Average Fuel Economy (CAFE) requirements have us forced us to drive smaller, lighter cars rather than giving us the choice of keeping safer heavy cars and driving less. If these laws were repealed, and replaced by a simple national gas tax, we’d have cleaner air, cheaper food and more choices!
Progress: The recent plunge in oil prices has highlighted the idiocy of our ethanol policy, and now even Republicans are refusing to defend it in Iowa; prospects are good for its eventual death. As to CAFE, no progress.
8. The Farm Bill – Born as a helping hand for struggling small farmers, it now rewards the largest professional agricultural companies like Butterball, Tyson, Sunkist, Cargill and Monsanto. It encourages the production of junk food-through subsidies for sugar, corn and high-fructose corn syrup-thus contributing to the epidemic of obesity and diabetes in the U.S. And it includes the Supplemental Nutrition Assistance Program (formerly known as food stamps), which is a nice idea but poorly implemented; I recently stood in line behind a woman who used hers to buy a jug of wine. (It was Gallo, one of those large agricultural companies who know how to play the game in Washington.)
Progress: We got a new Farm Bill in 2014, as we do every five years, but an impact statement by the University of Missouri, released just this month, reveals that government spending remains unchecked. Only the programs that distribute the money have changed. And interestingly, the report predicts continued production and use of ethanol, though acknowledging that, “Results are sensitive to assumptions about implementation of the Renewable Fuel Standards.”
Bottom line: Progress is being made!
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This Goldilocks Market
My three most important market maxims are these:
1. Trends tend to last longer and go further than people expect.
2. Trouble tends to come from where it’s least expected.
3. Whatever everyone is most worried about is not the thing you should worry about.
Starting with the last, it’s clear that the most common worry among investors today is that Janet Yellen will soon raise interest rates and thus put an end to the bull market.
Since (almost) everyone is worrying about it, the market in fact has already discounted this development-and thus you shouldn’t worry about it!
Furthermore, there’s an old rule, developed decades ago when interest rates movements were far more common, titled “Two Jumps and a Tumble,” which says that in general, it’s the second interest rate hike that most commonly precedes a market tumble.
Instead of interest rates therefore, real trouble will come from somewhere else. But where? Contenders include oil, Argentina, Brazil, the U.S. National Debt, the California water shortage, Cyprus, Russia, bitcoin, NSA, TSA, CIA, IRS, ethanol, North Korea, globalization, education, immigration, rising sea levels, gun control, the Supreme Court, insider trading, a strong dollar, China, ISIS, Iran, etc. Take your pick.
And getting back to maxim number one, for all its choppiness and sluggishness of recent months, the fact is that the market’s long-term trend is still up.
And if I can mention the latest “important” economic numbers, released last Friday: unemployment is down to 5.5%, but wages are still stagnant. To me, this is a Goldilocks condition for the market, neither too hot nor too cold but just right-and thus a fine climate to support further market advances.
So what might you own today?
How about a leading provider of network security technology?
Palo Alto Networks (PANW)
With companies small and large (Target, Sony, Home Depot) finding themselves vulnerable to network security breaches, money is pouring into the industry that’s working to stay one step ahead of the hackers, and a lot of that money is finding its way to Palo Alto Networks.
In 2012, the company’s revenues grew 115% to $255 million.
In 2013, revenues grew 55%, to $396 million.
And in 2014, revenues grew 51%, to $598 million.
As the company gets bigger, its growth is slowing. But margins are improving! In the latest quarter, after-tax margins hit 7.8%, up from 5.5% the year before.
And this should continue to improve, as renewal rates for the company’s core subscription business are north of 90%.
Looking ahead, analysts are looking at earnings growth of 136% this year and a round 100% in 2016.
The stock is not cheap; great growth companies seldom are. But it’s young (it came public in 2012) and it’s trending strongly higher, with a consolidation phase of the past month likely offering a decent buying opportunity.
So, if you like buying leading stocks, and you’re comfortable assuming the risk of holding a stock that has great potential to move (ideally up), you could simply buy PANW here.
But what I really recommend is that you become a regular reader of Cabot Market Letter, which originally profiled the stock, and is your best source for similar great growth stories.
Readers who bought when head analyst Mike Cintolo originally recommended the stock are looking at profits of 37% and are holding on for more.
Yours in pursuit of wisdom and wealth,
Publisher, Cabot Wealth Advisory
P.S. Now is the Time to Own Leading Stocks
Despite the most recent selling in the market, the overall trend remains positive. In Cabot Top Ten Trader, we feature a wide array of stocks and sectors you can benefit from in as little as 30 days. Tonight’s issue features a diverse mix of strong stocks, including a leading auto stock, that has the opportunity to bring you double-digit returns in the weeks to come.