What’s the Difference?
Solar Power Stocks are Strong
A Favorite Stock
---
The e-mailman recently brought this letter:
“Timothy,
“I have been reading your newsletter for quite some time now. Do you have a definition of how you qualify a stock to be in a certain category? For example: Emerging, small cap, value stock etc. … A list of them and what the qualifications are for each category would be extremely helpful.”
Thanks
Howard
For Howard and all the other readers who are curious, here you go:
Emerging market stocks come from less developed, faster-growing countries. China is the most notable of these today; even though it’s now the second-largest economy on earth, its growth rate of roughly 10% means it’s substantially easier for companies to grow faster there than here. Number two on my list is India, which is growing at a rate of 7%, and #3 is Brazil, which is growing at a rate of 5%. Russia has the potential to be a powerful force, but is currently hampered by poor management. Up-and-coming countries to keep an eye on are Turkey and Indonesia. Traditionally, investing in emerging markets entails greater risk than investing in U.S. stocks, but as the liquidity of these stocks grows, and the dependability of their accounting statements grows, the risks shrink. Cabot China & Emerging Markets Report is your best source of advice when it comes to investing in these stocks. In fact, it’s the #1 performer of ALL investment newsletters over the past five years, with a compound annual return of 17.9% (versus 0.3% for the broad market Wilshire 5000 Index).
Small-cap stocks are favored by investors who want their investments to grow faster, and know they can achieve that by investing in stocks not yet discovered by institutions. According to the table here—courtesy of Rick Wayman of Investopedia—a small-cap stock has a market capitalization of less than $2 billion … and I can’t argue with that.
Mega Cap: Market cap of $200 billion and greater
Big Cap: $10 billion and greater
Mid Cap: $2 billion to $10 billion
Small Cap: $300 million to $2 billion
Micro Cap: $50 million to $300 million
Nano Cap: Under $50 million
I used to think $1 billion was the cutoff, but that was decades ago; things have grown since then. Wall Street loves to focus on big stocks, because that’s where the lucrative investment banking business is. And because institutions have to put large amounts of money to work, most can’t afford to even look at small companies. But if institutions stick to mid-caps and larger stocks, they’re only looking at 11% of the stocks that are available … which means there are lots of overlooked opportunities in smaller stocks. In Cabot Small-Cap Confidential the average market capitalization of the past 10 recommendations has been $128 million, ranging from a low of $19 million to a high of $305 million.
Value stocks are inexpensive; that much is obvious. But by what measure? The amateur looks at price/earnings ratios, but they’re just one tiny piece of the puzzle. Professionals, like Roy Ward of Cabot Benjamin Graham Value Letter, look at much more. In fact, Roy looks at 44 separate factors, ranging from a firm’s current ratio to historical price/dividend ratio to quarterly earnings acceleration to price stability. Roy confines his research to very liquid large stocks that have proven management teams, and tries to buy them when they are out of favor. Over the past 12 months, Roy’s Classic Benjamin Graham Value Model has gained 11.6%, while the Dow has gained just 4.9%. More impressively, since inception in November 2002, this Model is up 10.9% annually, compared to just 1.5% per year for the Dow.
Finally, there are growth stocks. The ideal growth stock is one that starts out unknown, like Microsoft in 1986, and ends up big and famous, owned by thousands of institutions. But holding onto these stocks over multi-year periods, and through the big dips that come from time to time, is very difficult. With most growth stocks, we find it’s best to practice market timing, to invest aggressively when market trends are up, and then to move aggressively to cash when market trends are down. Cabot Market Letter—our flagship—provides the ideal combination of growth stocks and market timing, and has been honored numerous times by Timer Digest and Hulbert Financial Digest, which currently includes it as one of only nine newsletters on the 2010 Honor Roll for performance in up and down markets.
--- Advertisement ---
Limited Time Anniversary Price Rollback
Cabot Small-Cap Confidential is celebrating its three-year anniversary and in honor of it, we’re rolling back the price. Cabot Wealth Advisory subscribers can save $450 by subscribing by October 1, 2010.
A subscription to Cabot Small-Cap Confidential will help you discover Wall Street’s next big thing, long before most investors have heard of it. So don’t delay—this offer won’t last long!
---
As to the market, two weeks ago, I told you “I am confident that the market’s next major move will be up.”
Last week I repeated it. If you’re doubtful, go back and read this.
Today, I continue to think there’s much more upside potential to this market, and if you agree with me, I suggest you consider a growth stock that has the potential to be as big a winner as Microsoft.
The industry is energy, which is an absolutely enormous global industry. The sector is solar power, which is booming now as costs come down, and demand ratchets up. (Don’t underestimate the power of the market as people strive to develop alternatives to oil.) And the company is JinkoSolar, a Chinese company that claims to be the “world’s leading vertically-integrated PV manufacturer of high quality mono and multi-crystalline modules, cells, wafers and ingots.”
There are many other companies doing well in the same sector, and many of them are attractive, too. But JinkoSolar (JKS) stands out for these reasons.
1. It’s small, with a market cap of just $530 million.
2. It came public quite recently, in May of this year, so it’s still fairly unknown, which means most potential owners don’t own it yet.
3. The company turned profitable in 2007 and today it’s growing like a weed. In the second quarter, revenues grew 310% from the prior year to $133 million while earnings surged from nine cents per share to $1.18 per share. After-tax profit margins were 20.1%.
4. The stock is strong! After coming public at 11 in May, it dipped to a low of 8, and then began a rocket-ship ride that took it to a high of 30 last week.
Since then, JKS has dipped to its 25-day moving average at 24, and if you’re interested, I think you can nibble on a little here. For continuing coverage of the stock, however, I suggest you try a no-risk subscription to Cabot China & Emerging Markets Report, whose editor, Paul Goodwin, is keeping a close eye on the stock.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
