Looking for Leaders in the Stock Market - Cabot Wealth Network

Looking for Leaders in the Stock Market

Two weeks ago I asked whether General Motors could yank my father-in-law’s pension should the worst case (Chapter 11) scenario occur.  Cabot Wealth Advisory Editor Elyse Andrews did a great job of presenting a bunch of the informative responses two weekends ago, but little did I know that a few days later, GM would actually take a big step toward chopping the benefits of retirees.

The company, as part of a major restructuring, said it was going to stop all health benefits for salaried retirees that are over 65, starting next year.  The exact details have yet to be released, but it sounds like my father-in-law will get some extra money in his pension check, but then he’ll have to buy supplemental insurance to go with Medicare next year.  Not great, but not a disaster.

My wife’s grandparents, however, could be put hard to it.  (Her grandfather was a GM lifer.)  They’ll both have to buy supplemental insurance, so effectively, they’ll have a lot less money to live on once the health insurance is paid.

Take an Active Role in Your Finances

All told, I have mixed emotions about the whole thing.  On one hand, GM has to cut back some of these legacy costs; they’re paying so much money in retiree benefits that the company basically can’t compete with any non-U.S. auto maker.  Eventually, that could cause bankruptcy and ruin for all the employees and retirees–especially as Uncle Sam has his hands full bailing out myriad financial institutions right now.

On the other hand, these retirees could have (probably would have) looked for other jobs during their careers if they knew their pension wasn’t safe.  And, of course, they were given the company’s word that working for GM for 30 or 40 years would pay off big-time–and now that promise is being pulled out from under them.  And the reason is mainly incompetent management during the last couple of decades.

I think the biggest lesson from all this is to take an active role in your career and, most importantly, your finances.  Most people just cakewalk for years, and then when it comes time to retire, they find out they don’t have enough money to pay the bills. I hope I can help a few people out there put themselves in a better position.  Anyway, I’d be happy to hear your thoughts on the subject.

The New England Patriots began their training camp today, beginning what every team hopes will be a six-month journey to the Super Bowl.  I’ve always found the strategy and intricacies of football interesting; players and coaches literally spend 60 to 80 hours per week preparing for every game, evaluating their own team and other teams, installing new schemes and so on.

But what do these professionals do for the first couple of weeks at camp?  Practice the basics!  That’s right–even though most players were on the team a year ago, even though they’ve been playing football for the past 20-plus years, even though they’re some of the best conditioned athletes in the world, these players go through basic blocking and tackling drills to start.

Back to Basics

Recently, I’ve been receiving a lot of, shall we say, novice emails from readers.  And since I think the next major move in the market will be up–after a few weeks of bottom-building–I wanted to spend a minute reinforcing some basics that will help any investor improve their portfolio’s results:

1. Cut your losses short.  The only sure way to make money in growth stocks is to make sure no single stock (or two or three) will destroy your portfolio.  To this day, this remains the most important rule in growth stock investing, yet it’s the hardest to follow.  Don’t ever average a loss!

2. Respect the market’s action.  Way too many investors just look for stocks without considering the market’s major trend.  If you’re in a bear market, 75% of stocks are heading south, so you must be defensive during those times.

3. Low-priced stocks are low-priced for a reason.  Yes, you can make money in low-priced stocks if you have in-depth research and a proven system.  But most people don’t have either-they just want lottery tickets that they believe could pay off big.  Yet they almost never do.

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4. ALL stocks eventually top … and they top when the news is good.  Most investors have a hard time letting go when a stock has been “good” to them, especially when positive news comes out.  Well, get over it.  A stock is not your child, and furthermore, you can always buy it back if all appears well.  It’s OK to take some chips off the table (some, not all) as the stock works its way higher.

5. Think contrarily.  What’s the main reason most investors have trouble making money in stocks?  It’s because the market is a contrary animal–it acts nearly the opposite of how an intelligent person would.  Thus, when the market looks terrible, you must train yourself to expect better times ahead.  And when all appears wonderful, it’s probably a good idea to take some profits.

6. Most important … watch your portfolio!  Most investors, shockingly, view investing as a hobby.  But you need to treat it as a business, or if you like, as a second, part-time job.  You have to give thought to your portfolio, your strategy and (very important) your risk.

I actually talked to a subscriber last week who, partly because he wasn’t paying much attention, has seen his good-sized account fall by 60% in the past few weeks; he was heavily margined in a bunch of stocks that have broken down.  Such a drop is devastating, and can take years to recover from. 

So give your portfolio some thought; this is your hard-earned money we’re talking about.  Don’t put all your stocks in one basket, commit to cutting all losses short, and know how much risk you have (i.e., how much would you stand to lose if a stock, or the market, fell 10% overnight?).  It doesn’t take more than a few hours a week to keep track of things, but doing so will greatly improve your returns.

Looking for Leaders

As for the market, my view is a bit split.  I do believe that last week the market likely formed a major low.  All the pieces were in place for one, and the big-volume rally, combined with the widespread fear and panic, tell me that some type of low was put in place.

However, that doesn’t mean we’re now in a bull market.  It’s likely that a few weeks or more of bottom-building will be needed.  Giving evidence to that view is the nature of the nascent rally–so far, the only stocks making solid upside were the most beaten-down groups of the past few months, i.e., financials, homebuilders, airlines, travel-related stocks and so on. 

It’s tempting to play the rotation game, chasing the financials and selling commodities (which are getting crushed), and then selling the financials and hopping on the next hot group.  But, really, that is a VERY tough game to play–I don’t know anyone who does it consistently well.  You’re better off being patient and waiting for a real bull move to get started.

One thing I do look for when a market initially turns up is the sectors that first hit new peaks.  There aren’t many doing that (again, the strong groups are those just lifting off tremendously oversold lows), but so far the biotech group is where most of the strength is found.  I can’t see any ruling reason the group is doing so well … but that’s not a bad thing, as oftentimes the “reason” a group is rallying only appears a few weeks after the move begins.

Anyhow, my three favorite stocks in the group are all strong, profitable and have reported earnings this week–Celgene (CELG), which has two leading cancer treatments; OSI Pharmaceuticals (OSIP), whose Terceva drug is sold by giant Genentech, which itself agreed to be bought out this week; and Illumina (ILMN), which we call the King of Genetics, as its myriad sequencing and array systems allow research outfits to better study patterns of genes.  All of these stocks have appeared in Cabot Top Ten Report in recent weeks and months.

Could the biotechs roll over and die?  Of course!  The market could do the same.  But the savvy investor is looking for early signs of real leadership–not the off-the-bottom stuff–and the biotechs are attracting major institutional money flows since the market low.  Take note!

Until next time,

Mike Cintolo

Editors Choice:  Michael Cintolo is Vice President of Investments for Cabot, as well as Editor of Cabot Top Ten Report, a unique publication that provides the best source of new stock ideas for all types of investors.  Using a proprietary screening system, Cabot Top Ten Report gives subscribers the ten strongest stocks in the market every week, tells subscribers why the stock is acting so well, and offers a suggested buy range.  Since the start of 2007, the average Top Ten stock is up more than 30% on an annualized basis, while the S&P 500 is down.  If you want to always be on top of what stocks and sectors are acting best, give Cabot Top Ten Report a try.



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