Buy What You Know?
Make a Note, Not a Bet
Finding Love With Jiayuan.com?
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Investing legend Peter Lynch made his fortune (and fortunes for his investors) by concentrating on companies whose products he knew.
So I’ve been asking myself what companies I actually count on in my life for the products and services I use every day.
Here are the results.
From the moment when I get out of bed and stagger into the study to look at the day’s weather on Yahoo!, I rely on Apple (AAPL) products. That includes the home iMac I use to figure out whether I’m going to need a jacket or an umbrella, the Cabot iMac on which I research and write Cabot China & Emerging Markets Report (and this Cabot Wealth Advisory), the iPhone I use to keep in touch with the world (and to hold the games I play to escape the world) and the MacBook that sits on the couch when my wife and I are watching television or streaming movies.
And soon, I expect to add an iPad to my Apple arsenal.
A couple of times a week, I stop at a Starbucks (SBUX) on my way to work for a venti latte, a beverage that I nurse all morning, usually finishing it during the Cabot coffee time when we all head to our basement conference room for a review of what we’re working on (plus close analysis of Patriots games, American Idol and general gossip).
And on weekends, my wife and I sometimes find that the vanilla-bean scones at Starbucks make for a great snack. But I size the venti latte (that’s a large for non-Starbucks fans) down to a grande (medium), since I don’t need to be all that awake on the weekends.
While I’m at work at Cabot’s Salem, Massachusetts, headquarters, I fill my caffeine needs with the Keurig single-cup coffee maker that sits in our downstairs kitchen. We have an industrial-sized machine that can crank out enough cups in a row for the entire crew, and a wide selection of company supplied K-Cups from the eye-opening Jet Fuel to the disgusting Raspberry Blast flavored coffee.
Behind that Keurig machine is the coffee empire of Green Mountain Coffee Roasters (GMCR), the Vermont company that has morphed from a small, local roaster and distributor into a national (and international) caffeine juggernaut. The company bought the Keurig brand a few years ago and has been enjoying the benefits of recurring income from K-Cup sales.
That recurring income picture just keeps getting better, because Green Mountain cut a deal this year that will put Starbucks coffee (at a premium price) into K-Cups, and Keurig brewers into Starbucks franchises just in time for holiday shopping.
The final big brand that’s a big part of my life is Ford (F), courtesy of the Ford Ranger pickup truck that brings me down Interstate 95 every day from my New Hampshire home to Cabot’s office.
This is my second Ranger. The first was sold to a broker who exported it to Central America, where it’s probably still alive and kicking. My current edition is creeping toward 150,000 miles, which is hardly surprising since I put on a little over 100 miles per day with my commute.
I appreciated Ford’s willingness to go it alone during the Great Recession, refusing government assistance and handling its own recovery.
So how would I have done if I had followed the Peter Lynch model and bought the stocks of these companies whose products I enjoy?
GMCR looks like one of the strongest stocks on the market today, as Keurig sales will continue to drive future K-Cup purchases and global expansion remains a distinct possibility.
But F has come under bearish pressure as investors worry about the possibility of a double-dip recession and can’t get a definitive read on how the resurgence of GM and Chrysler will affect Ford’s market share.
SBUX has certainly come a long way since early 2009, but investors appear to be uncertain about whether overseas expansion can provide the growth necessary to make up for the firm’s saturation of the U.S. market.
The investing lesson I take from this little exercise is that in the almost 30 months since the market bottom in March 2009, many of the most successful companies have been those that work the high-margin side of the street.
Apple, Starbucks and Green Mountain Coffee all price their products at the top of the range for their respective categories. Value conscious consumers are more likely do their computing on machines from Dell, buy their java at Dunkin’ Donuts and their make-it-yourself coffee from the supermarket.
But despite the economic woes of many Americans, there are still plenty who are willing to spend money for distinctive premium brands. Other examples include Lululemon Athletica (LULU), whose high-end yoga clothes have made the leap to leisure wear and Under Armour (UA), a company based on hard-core athletic wear that’s taking aim at Nike’s position as a brand platform.
Savvy retail investors might be well advised to concentrate on these high-end brands during this rocky patch in the market.
Like most individual investors, I occasionally get a brainstorm, a little hunch about what the market or an individual stock is going to do.
Back in February, I was looking at the Guggenheim China Small Cap ETF (HAO), an exchange traded fund that tries to duplicate the performance of the AlphaShares China Small Cap Index. The AlphaShares Index tracks the performance of publicly traded, China-based small cap companies, which makes it a high-risk, high-reward instrument.
I saw that HAO, which had peaked at 33 in early November 2010, had dipped below 30 after a three-month correction. Given that the Cabot China-Timer was still flashing a buy signal, a 10% dip in HAO seemed to me like a decent buy point.
So I took three steps over to Tim Lutts’ desk and expressed my optimism on the ETF’s prospects.
All he said was, “Write it down.”
This is a common piece of advice from Tim, who believes strongly in taking intuitions and hunches seriously, as long as you don’t do anything silly like act on them!
Tim has organized lots of little contests based on writing predictions down on a sticky note. We’ve made forecasts of when the first Cabot employee would actually buy a pair of Crocs, when someone would buy the first iPad, when one of us would first buy a car made in China (that one’s still pending).
I’ve even heard Mike Cintolo tell someone to “do a Tim-Note on it,” when someone expressed an opinion about the future.
The Tim-Note I made for HAO reads “Buy HAO 2.9.11 at 28.92.”
A quick check of the chart for HAO will tell you that it’s a good thing I didn’t actually buy it.
HAO drifted to 27 in late March, rallied to 31 in mid April and has now put in a sloppy bottom between 22 and 23.
The investing lesson here is to always be learning, but keep the cost down. If you get a distinct feeling that you know where a stock (or the market) is going to go, write it down! But for heaven’s sake, don’t actually risk money at on it unless you have more than a hunch to back it up.
My Tim-Note taught me that my hunches, which come to me for free, are worth every penny.
The more reliable way to go about actually putting money to work in the stock market is to use a market-following timing indicator like the Cabot China-Timer to figure out the health of the market. By looking only at what the market has actually done, this indicator avoids anything as risky as a prediction. But knowing with certainty what the direction of the market actually is, can give you the confidence you need to put money to work in strong growth stocks.
For now, a nice, specific Tim-Note can increase your knowledge while leaving your money intact.
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Investors have gotten a lot of mileage out of following the fortunes of Chinese companies that can be described as “the ________ of China.” The big one is, of course Baidu (BIDU), “the Google of China.” But there’s also Ctrip.com (CTRP), “the Expedia of China,” and Sina.com (SINA) and its Sina Weibo, “the Twitter of China,” and plenty of others striving to fill big shoes.
One interesting candidate for this kind of nickname is Jiayuan.com (DATE), which apparently wants to be the Match.com of China. Founded in 2003, but only beginning paying operations in 2008, the company’s online dating platform offers free registration on jiayuan.com and even allows registrants to search through its entire database without charge.
If the search turns up someone that the registrant is interested in, he/she can even send an initial message to the interesting party.
But in order for the person who gets the message to read it, someone--either the sender or the receiver--has to pay for a number of virtual stamps.
The revenue picture is complicated by the number of membership levels, by the availability of personal search and matchmaking services and by other online items that can be purchased.
Making sense of revenue and earnings trends for a company this young is tough, as growth from an extremely low base is unreliable. Still, it’s hard not to be impressed by the 1,000% earnings growth (from one cent to 11 cents per share) in Q2, or the 132% revenue growth for the quarter that followed three quarters of growth in excess of 200%.
Critics have dinged Jiayuan.com for encouraging one-night stands, for posting fake profiles, for serving as a front for prostitution and for deceptive sales practices, and these charges have kept a lid on DATE. Some of these charges have also been aimed at other dating sites. And it’s entirely possible that some of the charges are true. Cutting ethical corners and bending rules is rife in the online dating world.
But what I like most about Jiayuan.com (aside from the astonishing addition of over a half million new users per day!) is the chart for DATE, which shows huge volatility following its mid-May IPO. The stock ripped from 10 to over 15 in a couple of weeks, then dipped to near 9 in June, then headed back to 15 in July.
Now, however, DATE is calming down, losing amplitude in its swings and flattening out near 13. A few weeks of quiet trading will do the stock a heap of good, and it will make any breakout, especially one accompanied by a surge in volume, really stand out.
I have DATE on my personal watch list, and may add it to the watch list for Cabot China & Emerging Markets Report if it continues to show technical strength. The exciting story and explosive fundamental growth are already there.
Sincerely,
Paul Goodwin,
Editor of Cabot China & Emerging Markets Report
