Long experience has taught me that the number-one thing subscribers want from Cabot is stock tips. They want the name of the next Apple (AAPL), the next Netflix (NFLX), the next Amazon (AMZN).
But what I’ve discovered is that many people, even when presented the right stocks, don’t know how to handle those stocks properly. What these investors really need is a good set of rules, combined with the discipline to follow them.
So today it’s back to basics, with five ways to increase your profits and reduce your risk.
1. Avoid Low-Priced Stocks.
Too many investors reason faultily that low-priced stocks offer greater potential to increase your profits than high-priced stocks. They believe—wrongly—that it’s easier for a $2 stock to double than a $20 stock or a $200 stock.
The truth, however, is that price is no impediment to a stock’s progress. Any stock can double if management makes the right moves and investors’ opinion of the company improves. But when a person buys a low-priced stock, particularly one with low trading volume, what he buys is higher risk. Risk is higher because these stocks are unproven. Institutions are not supporting these stocks. And increased risk is the last thing beginning investors need.
2. Don’t Avoid High-Priced Stocks.
Still, many amateurs ignore high-priced stocks. One reason for that is that they want to own a large round number of shares, like fifty, a hundred or a thousand. So if I recommend Amazon (AMZN), currently trading at around $650, they reply, “Don’t you have something more reasonably priced?”
Instead, they should recognize that high-priced stocks get that way by being successful, and that there’s nothing wrong with buying just a few shares of such a stock. In fact, I’d much rather own two shares of Amazon at $650 than 650 shares of any stock trading at two dollars.
3. When Investing in Growth Stocks, Watch the Charts.
Everyone likes a good story, but savvy growth stock investors require their stocks to also be in confirmed uptrends. That’s the proof that other investors like the stocks, too, and are increasing their opinion of their future prospects.
The first thing I do when I hear a growth stock recommended is look at its chart. If it’s not going up, I’m not interested. Sure, if the story is good, I might put it on my watch list, but I know my odds of success are much better when I invest in stocks that are already in uptrends—like Facebook (FB) today.
4. When Investing in Value Stocks, Watch the Value.
Again, a good story can be attractive. Today, for example, I could argue that certain oil stocks or solar power stocks have been oversold. But unless I see the valuation explained with clear, cold numbers (the way Roy Ward does in Cabot Benjamin Graham Value Investor), I’m not interested.
5. Diversify—But Don’t Overdo It.
This is the oldest rule in the book, and there’s a reason for it. Nothing is certain. Even the best companies and stocks can be brought down by unexpected events—just like energy stocks were over the past 15 months.
I recommend diversifying across stocks, of course; across industries, so you’re not overly concentrated in any one sector; and across time, which means not jumping into a group of stocks on the same day.
But how many stocks should you own? Many experienced investors often hold 20 or 30 stocks, though I’ve noticed many of those people often have a number of “dead” stocks in their portfolios. I like to own between five and 10 stocks—and to keep a close eye on every one of them. That’s concentrated diversification, and a good way to increase your profits and reduce risk.
Note: if you’d like a closer look at my style of portfolio management, Cabot Stock of the Month provides a nice window. At present, I have positions in seven stocks. All are profitable. The average profit is 81%.
One Strong Growth Stock Worth Considering
Moving on to the market, with the major indexes completing their third straight week in the black and the intermediate-term trend up, we believe you can slowly put money to work on the market’s leading stocks.
And here’s one we recommended in last week’s Cabot Top Ten Trader.
Why the Strength
Stamps.com is thriving by bringing all the functions of the U.S. Postal service right into small businesses, enterprises and home offices. The company’s services allow users to print shipping information onto packages, pay for postage and insurance, create customized stamps and design themed mailings.
The company made huge strides in 2015, growing revenue by 45% and increasing earnings from $2.47 per share in 2014 to $4.43 in 2015. The company’s latest quarterly report on February 25 featured a whopping 118% boost in earnings on 67% revenue growth with a 40% after-tax profit margin. Investors heartily approved. But then, investors have been enthusiastically driving Stamps.com’s stock higher since October 2014. T
he concept of using a printer and an Internet connection to handle all mailing and shipping functions is clearly winning approval from both users and investors. Estimates are for the company to increase earnings by 10% in 2016 and 15% in 2017. The company also has a $20 million share buyback program that’s the equivalent of about 1.25% of its shares. This is a story with great fundamentals.
STMP came to life in 2011 after years of flatlining. But the current enthusiasm for the stock dates to the fourth quarter of 2014, when it began a series of quarterly-earnings-based rallies on positive volume. With major corrections in August and September 2015 and January and the first half of February 2016, the stock has been volatile. But the stock’s gap up from 96 to 117 last Friday came on twice average volume, and kicked the stock to its highest level since Tech Bubble days in 2000. STMP is holding onto all of last Friday’s gains, but a little patience should present an opportunity to get in on a dip of a few points. Use a fairly loose stop at 107 to allow for current volatility.
Every Monday, Cabot Top Ten Trader steers you to 10 hot stocks with great potential to soar in the weeks ahead. As an example, Stamps.com (STMP) is up 2.5% in the five days since it was recommended. If this seems like the type of concise analysis on leading stocks that you need to ride the market as it continues its climb higher, I suggest you check out Cabot Top Ten Trader here now.
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory