Simplify Your Investing System

Simplify Your Investing System

Rely on a Few Time-Tested Rules, Tools and Indicators

A Winning Rental Car Stock

As a market advisor, I field all types of questions from subscribers by email every day. The majority of the questions have to do with stocks that I’ve recommended, either recently or in months past, but others are about something in the financial news that day or week and how I think it will affect the market.

These topics span a wide range—everything from the Fed to the U.S. dollar (or other currencies) to housing starts to Treasury rates to budget deficits to Congressional legislation to elections to the calendar (“sell in May and go away” etc.) to manufacturing data to foreign stock market performance to scandals (Bernie Madoff was a popular one) to tragedies (Japan’s nuclear mess-up, Hurricane Katrina) to technical stock indicators (MACD, Stochastics, Bollinger Bands and RS) to earnings reports from bellwether companies to opinions of other people (especially analysts who set price targets).

All kinds!

But you know what? 95% of the time when I get a question like, “Hey Mike, what do you think the weakness in the Japanese Yen is going to do to the market?” or “Won’t the weakness in Europe spill over to the U.S. and hurt stocks?” my answer is usually a simple “I have no idea.”

It’s not that I think these are dumb questions—in fact, I think it’s good to think outside the box. It helps you avoid groupthink and can sometimes get you in on a theme early.

But the reason I tell people I have no idea is … well, because I have no idea.

And the reason I don’t have any idea is that I purposely try to keep my system relatively simple—I look at a limited number of inputs to determine whether to buy, hold or sell. And these inputs revolve around our SNaC approach to growth investing—a good story (clearly somewhat subjective), great numbers (mainly sales and earnings growth) and an uptrending chart.

Moreover, while I consider both fundamental and technical (chart action) factors before I buy, I generally sell based on technicals alone—I’ve learned how to spot abnormal action, so when I see it, I get out. Of course, the market itself plays a role here, too, and I have simple trend-following indicators I track for that, too.

The point is that, every day and week, I probably focus on five or six “core” things—the action of the stocks I own, my personal P&L (which might be the best indicator there is), the market timing indicators, etc.—and maybe another three or four secondary things, such as a sentiment measure or two, as well as the action of defensive stocks (I look at symbols XLP and XLU), which give me a flavor for how much risk investors are willing to take.

That’s it!

There’s no need to analyze foreign markets or the political shenanigans in Washington, D.C., or even the pundits on CNBC. Ignoring that, I determine the market’s health in just a few minutes every day. Simplify your investing system.

To me, this is a great example of Leonardo DaVinci’s classic saying, “Simplicity is the Ultimate Sophistication.” Most investors spend their early years trying to re-invent the wheel—testing different indicators, practicing the complex and arcane. I remember when I started at Cabot in 1999 I tested everything—one time I even tested moving averages of moving averages!

And you know what? Some of these arcane things worked pretty well, but it was sort of like hitting one or two good golf shots every nine holes—it was enough to keep you coming back to the course (or, in this case, keep researching new methods), but not enough to really improve your game.

Thus, I slowly began paring back … and back … and back. Now I have the handful of things I watch regularly, and that’s about it. Most important, my results have improved and there’s less stress along the way!

There are two main reasons why simpler is better.

First and foremost, many of these “indicators” (meaning economic reports or opinions from analysts) don’t really affect the company or the stock. And even if they do, the only way to gauge the effect is to watch the stock itself! In other words, the only opinion that really matters is the opinion of the market, which is dominated by institutional investors.

Second, the late, great Marty Zweig once wrote that, even in an incredibly bullish market environment, you’d be lucky to get 80 out of 100 indicators to be bullish. Thus, even in a great environment, your various “indicators” are going to conflict in a big way—and that will only leave you confused and likely missing out on some great trades.

The upshot of all this is that many investors make life more difficult than it has to be. When investing, the key is to have a few time-tested rules and tools and indicators that you rely on. If you’re relying on much more than that, the odds are that you’ll just end up confusing the situation.

So keep it simple! Simplify your investing system.

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As for the current market, I generally like what I see right now. Obviously, the major trend of the indexes and most stocks remains up, but below the surface, I’m seeing more growth stocks act well, while many defensive-type stocks (which had been leading for the past couple of months) take a breather.

That said, I’m also cognizant that the environment remains very choppy—earnings season certainly has something to do with that, but so does the general market, which has whipped around a bunch in recent weeks. So there’s still a preference for big, liquid stocks that trade at reasonable valuations and have a degree of safety (or, at least, surety) to them.

Hence my recommendation today—it’s Hertz (HTZ), the gigantic car rental company whose recent buyout of Dollar Thrifty has made it the top dog in the industry. Here’s what I wrote about the company in Cabot Top Ten Trader this past Monday:

“The rapid consolidation of the rental car business has produced excellent opportunities for investors, as a gradually improving economy and more efficient operations yield higher profits. Hertz Global Holdings was featured here back in February, and Avis Budget Group (CAR) made its debut here in April. Hertz is getting a surge in investor interest from its takeover of Dollar Thrifty Automotive Group earlier this year, a move that made Hertz the top dog in the industry, as well as giving it an entrée into the lower-priced end of the rental market. The company’s Q1 earnings report on April 29 featured a 21 cent per share profit, which beat the consensus number of 16 cents by a wide margin. Revenue was up 24% to $2.44 billion, while projections were for just $2.39 billion. According to management, the integration of operations from the Dollar Thrifty acquisition is proceeding more quickly than expected. Guidance for the rest of the year was also higher than expected. With solid revenue and earnings outlook, support for the rental story from Avis and a macroeconomic push behind the rental business, Hertz Global looks like a solid winner.”

What appeals to me about this story is that there’s real earnings growth going on here; analysts see earnings leaping a whopping 44% this year, and another 30% this year. With the stock at 25, HTZ trades at just 13 times 2013 estimates … estimates that were just reaffirmed by the company’s management in the latest quarterly report.

That said, HTZ has already had a big run during the past few months, so why recommend it now? It was just announced this week that some big owners of the stock (including Bank of America and Carlyle) will sell off their remaining slug of shares they’ve been holding, worth about $1.3 billion. All told, we’re talking about nearly 50 million shares.

In the short-term, such an offering could put a lid on the stock; if the market pulls in for a few days, it could even take the stock a few points lower. But long-term, I think this move removes some lingering overhead and will help move the stock to stronger hands.

Bottom line, I think the stock is buyable around here or, preferably, on a pullback of a point or two. If you buy, I advise using a straightforward 10% loss limit to start.

All the best,

Michael Cintolo
Editor of Cabot Market Letter
and Cabot Top Ten Trader

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