Heed the Market’s Message; Two Sectors to Watch

Three weeks ago, I skipped town for a few days, traveling to Jamaica with my wife for a conference of publishing professionals. The obvious benefit was the weather; this was my fourth visit to Jamaica over the past decade, and every time the weather has been lovely … if boring. As a New Englander, I’m accustomed to weather that changes.

But the real reason for the trip was to share ideas with other publishers about the ever-changing nature of our industry.

The sad truth is that people are reading fewer books; 40% of Americans read one book or less last year.

People are buying fewer newspapers as well; The New York Times recently announced it was cutting 100 jobs in the newsroom – about 7.5% of the newsroom’s 1,332 employees.

The question is, “What’s a publisher to do?”

The answer: Turn to the Internet, which is where many of those people have gone. (You might say turn to the TV as well, but I figure most of those people are too far gone.)

So in the past year, we’ve beefed up our Internet presence dramatically. You received this Cabot Wealth Advisory through the Internet. You can receive all Cabot’s publications that way as well. On our Web site, you can read the latest updates, search back issues and more.

Furthermore, the beauty of the Internet is that you can make your opinions heard.

You can join our new discussion board, Cabot Forum, sharing your thoughts on a wide variety of subjects with other individual investors. You can even start your own topic!

Alternatively, you can email me – or any of the other editors – directly. Ask questions. Tell us what you like and what you don’t like, remembering, in the process, that I appreciate good English. I might even repeat your thoughts to our 100,000 plus readers!

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Hotel Observations

Getting back to Jamaica.

One of the things I like to do in hotels is study the functions board to see what groups are meeting.

In our Jamaica hotel, I noted that Atlas Oil was meeting. Atlas Oil, I find, is a national distributor of petroleum products. Headquartered in Michigan, it provides services in 11 states, from Florida to Texas to Minnesota to Pennsylvania. It’s privately owned, but growth-oriented, as evidenced by its record of acquisitions.

With oil prices hitting record highs, I’d like to have been a fly on the wall in their meetings.

Also meeting at our hotel were young people from Optimum Lightpath. I first joked that this might be a group devoted to discovering the ultimate route for reincarnation … but later found it’s “just” an Ethernet Service Provider serving New York and New Jersey!

Further digging, however, found that Optimum Lightpath is a division of Cablevision (CVC), which provides cable TV service in the same area. Cablevision’s revenues grow nearly every year and should top $6 billion this year, but the company has lost money every year since 2001! A quick look at its chart reveals nothing interesting.

Also at the hotel was a big group of young people from HP. In the old days, people knew this company as the baby of William Hewlett and James Packard, who graduated from Stanford University together in 1934. (It was a precursor, in that way, of both Yahoo! and Google.) But today it’s simply HP, famous for what must be insanely profitable printer ink cartridges. HP had a big party at the hotel, and I’m wondering whether the folks at headquarters even knew.

HP’s revenues will probably top $110 billion this year, while its earnings are expected to grow 20%, to top $3.50 per share, and that’s not bad. But a look at the chart (HPQ) reveals a stock that’s performed no better than the market over the past eight and 12 years. Again, that’s not bad, but we want to do better than the market. Short-term, HPQ is still trading below last year’s high of 54.

Finally, there was the mysterious Greenberg Quinlan Rosner. Lawyers? Sports agents? Chiropractors? Nope. A quick Internet search revealed a Web site that describes “a global leader in public opinion research and strategic consulting.” More specifically, “Whether you want to win your election, lead your country, increase your bottom line, or change the world, Greenberg Quinlan Rosner can help you find the answer.”

And, most specifically of all, “For Democrats who need research and advice that shows them how to win, Greenberg Quinlan Rosner has the answer. We give campaigns an edge over their opponents, finding innovative ways to break through and win the toughest races in the United States.”

Now, what these folks were doing in Jamaica while there was a hot primary going on back home, you can guess as well as I. Planning strategy for the big battle to come, once the Democrat contender is chosen? Also sighted at the hotel was James Carville, lead strategist of Bill Clinton’s winning presidential campaign.

One thing is certain, however. After seeing the preparations for one of the dinners for the Greenberg Quinlan Rosner group, one of our group quipped, “The next time Hillary calls for a contribution, it’ll be just a little bit smaller.”

I’ll just stop right there before you start confusing me with the National Enquirer.

Now, on to the investing segment.

Market Maxim

One of the stars that we steer by at Cabot is Jesse Livermore’s maxim, “Markets are never wrong; opinions are.”

A more negative idea is conveyed by the aphorism, “The market will do all it can to separate you from your money.”

Today, these ideas are particularly important because we appear to be at a major turning point, a changing of the guard, if you will, and if you don’t heed the market’s message, you risk discovering that it has taken some of your hard-earned money.

The fact is, most leaders of the last bull market are toast. Google is 37% off its high. Apple is down 37%, too. Crox is down 66%. VMWare is down 52%. Baidu.com is down 40%. Garmin is down 51%. Sigma Designs is down 59%. Riverbed is down 60%.

All these stocks had great growth stories and great charts last year. Most still have very good growth stories this year. But that doesn’t mean they’re good investments.

They’ve been bad investments for months, and those who maintained otherwise, and bet otherwise, have found themselves separated from some of their money.

So what’s working? Two sectors.

What’s Working

First are natural resources, a strong indication that inflation will be a serious fact of life in the months ahead. We’ve written about some stocks in this area in recent issues and will almost certainly write more in the future.

Second are select international growth stocks, an indication that, in general, rapid growth is still possible in fast-growing countries such as China, India and Brazil.

Now, both these sectors run contrary to many Americans’ natural tendencies. Most of us have been conditioned to think that growth companies that add value to their products through human intelligence (particularly in the fields of technology and medicine) are better investments than companies that simply pull stuff out of the ground and sell it. And most of us have a natural bias to believing that American ingenuity, markets and laws enable companies to succeed more easily here than elsewhere.

But the market today is telling us otherwise, and if you choose not to share this view, well, refer back to those first two quotations.

Today’s stock lies squarely in the foreign growth arena. It’s a Chinese medical stock, one that may soon have a great impact on the American medical establishment as well.

Its name is China Medical (CMED), and here’s what Paul Goodwin, editor of Cabot China & Emerging Markets Report, wrote about it recently.

“China Medical Technologies, usually called C-Med, has two product lines, both technologically advanced, which present an intriguing combination of present revenue and future growth possibilities. The company’s more conventional diagnostic products use chemoluminescence to detect the presence of medical disorders. Patients’ fluid samples are processed using C-Med’s reagents and analyzers and the results show up as glowing dots in the samples. The company’s ECLIA (Enhanced Chemoluminescence Immunoassay) systems can be used to detect thyroid disorders, infectious diseases, tumor markers, diabetes growth disorders, infertility disorders, reproductive endocrinology, liver fibrosis and more. Sales of the analyzing consoles lead to recurring income from sales of reagents.

While the diagnostic business is booming, it’s not the reason C-Med holds a fascination for investors. That honor belongs to the company’s HIFU (high-intensity focused ultrasound) system, a machine that can kill solid tumors inside the body without incisions, anesthetic or pain. Using ultrasound at a level 50,000 times higher than that used to image pregnancies, the HIFU machine kills tumors by heating them to over 140°F almost instantly. There is no burning of skin or bleeding and the body cleans up the destroyed tissue on its own.

Therapeutic use of HIFU in China was approved in 1999 after ten years of research and development, and it has been used in over 40,000 cases across China against a wide variety of cancerous and benign solid tumors including liver, breast and kidney tumors. The enormous potential for C-Med comes from the onset of clinical trials at a university medical center in the state of Washington. While little news has surfaced from these trials, any positive results are expected to have a huge effect on C-Med’s stock.”

We just love the potential of the HIFU machine, which zaps tumors with no incisions, no blood, no anesthetic and no pain. And we like the company’s historical numbers, too. Fourth quarter results, released today, show that C-Med’s revenues grew 75% to $36.3 million, while earnings grew 46% to $0.60 per share, beating analysts’ estimates by $0.14!

The action of the chart tells us investors continue to climb on board, expecting great success for this company both in China and internationally. Short-term, CMED looks a little high to buy here, but long-term, the future is bright.

Editor’s note

China Medical may never be mentioned here again, but you can be certain it will be followed in Paul Goodwin’s Cabot China & Emerging Markets Report, named the top-performing investment advisory of both 2006 and 2007 by Hulbert Financial Digest, with returns of 76% and 74%. China is where the growth is! If you’re looking for expert guidance on investing in fast-growing international stocks, you owe it to yourself to read Paul’s advice. To get started with a no-risk trial subscription, simply click the link below.


Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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