Screening for the Best Stocks When to Sell Your Stocks
Outlook on the Stock Market Today
This year we celebrate 43 years of publishing our flagship publication, Cabot Market Letter and I thought it would be a good time to interview his current chief editor, Mike Cintolo to find out his successful formula for choosing the best leading stocks and his opinion about the market today.
Mike Cintolo got his start with Cabot back in 1999 right out of college; his Dad actually subscribed to the Cabot Market Letter, and Mike started reading the Market Letters in 1995. Mike dove into growth stock investing strategies, contacting Tim Lutts with questions and eventually asking for a job. After a couple of delays, Tim finally said yes, and I’m betting he considers it one of his better hires.
Mike steadily worked his way toward greater responsibility, and in 2007, took over as editor of Cabot Market Letter and Cabot Top Ten Trader, as well as being named Cabot’s VP of Investments. Basically, he’s the captain of our growth stock ship. Impressively, since taking over the Market Letter’s Model Portfolio, he’s outperformed the S&P 500 by more than 9% annually, better than just about any mutual fund I know of. In 2013, he’s up about 30%.
So that’s the background. When Mike and I talked this week, we covered his system, his methodology, his temperament, his outlook for growth stocks ... and just a touch of chatter about the Red Sox and Patriots. Here’s what he had to say.
Paul: Mike, I started out describing how you got where you are and your great record with Cabot Market Letter. My first question is simple … but not easy: What are the one or two factors that have allowed you to achieve these results?
Mike: Well, I’m sure people want to hear about some secret indicator or methodology, but the truth is that, through old hard work and a passion for the market, we’ve been able to develop some reliable rules and tools that (a) identify many of the market’s biggest winning stocks, and (b) allow us to hold them through their large upmoves. That system is based on both fundamental and technical factors, which is something few investors do—many focus on one or the other, but in all of my experience, the best results come from making sure a stock has a great chart and a great story and great numbers.
On the more personal side of things, I think my experience has helped—I started working here in 1999, catching the last year or so of the Tech Bubble. Then I lived through a three-year bear market and a couple of wars. Then came a four-year upmove into 2007, before the infamous 2008 mortgage bust. And now we have the current recovery. So, in a relatively short time, I’ve been able to experience literally every type of market, good and bad. And that’s accelerated my learning process. Paul: Yes, I’ve written about our SNaC approach (Story, Numbers and Chart) many times, and it resonates with people. But for people who want to get inside your brain a little, can you lay out your process of finding winners?
Mike: Sure. I usually start with a basic technical screening system—I look for stocks trading above 12, that trade at least $40 or $50 million per day (on average), are within 15% to 20% of their 52-week highs (though I might loosen this if we’re in a bear move) and are in the top 25% of performers during the past months. Fundamentally, I keep the criteria looser—sales growth of 10% or 15% in the latest quarter, and estimates that show the next couple of year’s earnings up 15% or more.
The goal of the screen isn’t to get a buy list, but instead, between 75 to 125 stocks that generally fit what I’m looking for. Then comes the “hard” work—I look at the charts and dig into the stories of each company. To me this is the fun part, though, and there’s clearly some subjective judgment that comes into play—after doing this for many years, you tend to know a high-potential story when you see one, with maybe a new revolutionary product that serves a mass market.
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Paul: OK, that’s good stuff. Now what about holding onto a stock? You mentioned that was the other part of the equation. Can you share some of your rules and tools that help you with that?
Mike: Let me first relay something I read a long time ago that really struck a chord with me. One investor said something like, “Most people have, at one time or another, owned a bunch of big winners—Home Depot, Cisco, Apple, Google, Research in Motion, Priceline.com and so on. But how many really made big money from them? Very few!” And that is so true—in a bull market, many investors tend to own some of the big leaders but most of them either own just a little, take a quick profit or get shaken out on normal weakness.
Selling too early is something I still struggle with, to be honest, but the longer I’m in this game, the more I realize it’s important to keep it simple. Once I do all my homework on a stock and the market and make a purchase, I tend to focus 90% on the chart itself—I’m trying to hold on until either some loss limit has been hit, or, with a winner, until truly abnormal activity shows up on the chart … which tells me the big institutional investors who had been buying during the prior few months are now paring back.
Paul: What tells you a stock is acting abnormally?
Mike: I focus on price and volume. Huge-volume days when the stock breaks lower in price, often on earnings, can signify an intermediate-term top. I also pay attention to relative strength—often a stock’s relative strength will fade for a few weeks even though the price heads up, which can give you a subtle sell signal. Lastly, I pay attention to where a stock is in its overall run—if a stock just got going two months ago, it’s unlikely to top out so soon. But if a stock’s been running for more than 12 months, the odds of a deeper, more prolonged correction are higher.
As you can tell, we don’t use exact sell rules, such as if a stock breaks the 50-day moving average, we’re out 100% of the time. And we don’t just trail a stop at 15% below the stock’s high. We use a combination of factors, including market timing, to help us sell. But it’s challenging.
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Paul: Since you mentioned market timing, why don’t you go ahead and give everyone a few pearls of wisdom on that.
Mike: Sure. I’m a trend follower. Period. End of story. Trust me, I read the news and follow the rumors leaking out of Washington, D.C. I’m aware of everything—but I need to see the market itself react before I take any action. I frequently get emails from subscribers saying they’ve bailed out because some catastrophe is supposedly coming. I can’t trade that way—it’s best to just go with the evidence, and that’s what we do.
Our market timing indicators are shown in every Cabot Market Letter, and they’re a big part of our outperformance. Our biggest success was being 90% in cash when Lehman went belly up! It wasn’t “fun” seeing the market tank, but I was proud to have our subscribers sheltered from the implosion.
Paul: What are you thinking about the market today? Is the bull healthy, or is this Washington sideshow set to bring the bears out in force?
Mike: Well, honestly, I’m a bit in watch-and-wait mode right now. That doesn’t mean I’m on the sidelines—we’re about 70% invested. But what I see is a lot of growth stocks that have had big runs since late June, and then showed a little abnormal action last week (huge down volume, biggest point drops in months, etc.). Few institutional-quality leaders actually broke down, and my market timing indicators are still positive, so I can’t get too worried here. But I guess I would say my antennae are up.
Long-term, though, I remain very optimistic. My biggest conviction in general is that it’s been 13 ½ years since the market topped out in March 2000, and during that time, investors’ sentiment has pulled a total 180-degree turn—in 1999, investors were upset if stocks didn’t rise 10% in a couple of weeks, whereas near the end of last year, most investors were content to get 2% or 3% dividends from a no-growth blue chip stock or a bond.
Long-story-short, I tend to think this secular (very long-term) bear phase is either already over, or is in the 8th or 9th inning. I’m thinking more and more about that fact so I don’t get caught up in the weeds of the day-to-day action. When a new secular bull market starts, it’s going to be ridiculously lucrative for investors that recognize it, and who have some sound rules and tools in place to ride it. That’s my biggest goal of all.
Paul: Last but not least—are we going to be celebrating a World Series title in Boston this year? And what’s up with Brady and the Patriots?
Mike: World Series, maybe, but either way, it’s been an awesome turnaround year for the Sox after last year’s disaster. As for the Pats … you won’t find many bigger Pats fans than me but the combination of injuries, the Aaron Hernandez shock and so many rookies to break in make 2013 look like more of a rebuilding year. I hope I’m wrong! (Paul: I think he’s wrong!)
Sincerely,
Paul Goodwin
Editor of Cabot China and Emerging Markets Report
and Cabot Wealth Advisory
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