Featuring Lutts’ Logic:
Odds and Ends
The Case for Gallons per 10,000 miles
A Solid Insurance Investment
My original plan for this issue of Cabot Wealth Advisory was to give you a list of “10 Resolutions That Will Make You a Better Investor in 2009” … or something to that effect. But Elyse Andrews, who edits the Weekend Digest, beat me to it by turning in tomorrow’s column early … which should teach me something.
So here’s Plan B, featuring a few odds and ends and one solid investment recommendation.
This past holiday season, for the first time in memory, our Cabot office received no gifts from the companies we’ve been doing business with all year. No popcorn from the list broker. No chocolates from the market data vendor. And no poinsettia from the insurance company down the street … whom I pay more every year! I know times are tough, but I think some companies (and people) are just using this recession as an excuse to cut back.
Speaking of cutting back, this week our governor in Massachusetts, Deval Patrick, noting the trend of shrinking state revenues, announced his plan to cut another billion dollars from the budget for 2009.
This reminded me that a few months ago, while perusing the Massachusetts state budget online, trying to figure out where all the money goes, I came upon the following phrase:
“The Conference Committee decided to adopt the Senate’s plan to change the name of the Department of Mental Retardation to the Department of Developmental Services.”
I have no doubt this will achieve the goal of reducing the perceived level of insult in some circles … but it also does a masterful job of obscuring the department’s actual function! To me, the “Department of Development” is group of the people in a private school who ask–ever so nicely–for more of my money. Alternatively, if I Google “Department of Development,” I first see entries related to economic development (the State of Ohio is first).
As a fan of clear writing, I give “The Conference Committee,” whoever they are, an F on this one. And a big raspberry for wasting my money.
On a brighter note, I recently received this email from a longtime subscriber who enjoyed a long and successful career as a professional musician and band director.
“In a band I played in, we came to a section in a piece where it was mine to do with what I might. I did.
“Director stopped us and asked what “that” was all about and didn’t I understand that we got paid as much for the rests as for the notes? I guess I didn’t. I later understood that this observation wasn’t original with him, and likely whoever did invent it must have been similarly provoked.
“Few people seem to appreciate the occasional but very real value of “doing nothing.”
“It’s too bad.”
J. F. from Massachusetts
J. F., of course, was referring to the practice of market timing, which basically means investing aggressively when the market is supportive, and shifting toward cash (and doing nothing) when the market environment is unsupportive. It’s a system we at Cabot have been practicing since 1970. Most years it helps our investment results, occasionally it doesn’t help at all. In 2008 it helped a ton, allowing us (and subscribers who paid attention) to keep much of the profits earned in 2007. For his leadership in keeping us on the right side of the market, kudos to our Vice President of Investing, Michael Cintolo.
Shifting into academic/environment/energy mode, I recently read an article in The New York Times that claimed we’d save more fuel as a country if we stopped measuring miles-per-gallon and began measuring gallons per 10,000 miles. The sentence that got my attention was this: “The jump from 10 to 20 m.p.g., for example, saves more gas than the one from 20 to 40 m.p.g. The move from 10 to 11 m.p.g. can save nearly as much as the leap from 33 to 50 m.p.g.”
On the surface, it doesn’t seem to make sense, and I assume that’s because we’ve been brainwashed (conditioned) into thinking m.p.g. is the gold standard. After all, the government’s mandated that it appear on the window stickers of all new cars.
So I opened up a spreadsheet and tried some scenarios, and here’s what I found. It’s absolutely true.
For example, if you get 30 m.p.g. in the city now driving your Volkswagen Jetta and you switch to the Honda Civic Hybrid because it gets 40 m.p.g. in the city, you’ll save 83 gallons over the next 10,000 miles.
However, if you can convince your neighbor who drives a Ford E150 Club Wagon that gets 13 m.p.g. in the city to switch to a Toyota Sienna with 4WD that gets 17 m.p.g. in the city, he’ll save 181 gallons over his next 10,000 miles (of city driving).
In each example, the improvement in m.p.g. is 30%, but note that much more gasoline (118% more) is saved by the switch away from the worst gas-guzzler.
Thus, if we really want to burn less gasoline, the battle to make a sensible vehicle that gets 50 m.p.g. is less important than the battle to get people out of the worst gas-guzzlers and into vehicles with more average consumption rates. To do that, it helps to focus not on m.p.g., but on gallons burned per miles traveled. So now I want the folks in Washington who’ve got us all conditioned to think about m.p.g. ratings to shape up. Make us read gallons per 10,000 miles instead, and help us understand where real progress can be made. Of course, knowing Washington, doing this will take years … if it is achieved at all.
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Finally, on the critical side, I received this email from an anonymous reader.
“You are missing the elephant in the living room. The Wall Street and markets you knew are gone. The Federal government has taken over and it will never be the same. Following the past approaches will eventually lose your following.”
Well, it’s true that Washington has more influence than it used to, and I’m not a fan of the trend. But I remain fully confident that markets will continue to function, that creative forces are alive and well in both the U.S. and around the world, and that companies both large and small are changing the world for the better and will continue to provide profitable investments for us in the months and years to come.
I have no doubt that every century of recorded history has brought out doom-and-gloomers who’ve proclaimed, “This trouble that we have made (or that our enemies have made) will be the end of civilization as we know it.” Many of them, I have no doubt, have been quite rational beings, well-educated and sober. But so far they’ve been wrong, and I’m betting that my correspondent above is wrong, too.
The reason is that man adapts! And I have history to back me up.
As I write, I’m looking at a century-long chart of the stock market (Dow Industrials, Nasdaq Composite and S&P). Overlaid on the chart are a variety of economic data, including discount rate, T-Bill rates, income tax rate, minimum wage, recessions, CPI and more. But of greater interest are the events, including the San Francisco earthquake of 1906, Halley’s Comet in 1910, the market closure (July 31 to mid-December, 1914) caused by the start of World War I, the Arab oil embargo of 1972 and more.
After every major disruption, man adapted and the economy recovered. Even better, the chart shows that the best times to invest are exactly when people like my anonymous correspondent fear that we may never be able to invest profitably again. Knowing that, I welcome his brief email.
Now for the investment idea. In recent issues, I’ve recommended genetic medicine companies, for-profit schools and infrastructure rebuilding companies, and those are still the three most attractive sectors right now, based on both chart action and fundamental prospects for growth.
But there’s another group of stocks whose prospects are better than average in the next bull market, and those are stocks that have come public in the past year or two and have not enjoyed a major uptrend yet. Stocks like these, in a nutshell, have no major selling pressures … and if their companies have good growth prospects, the stocks have major upside potential, as they become discovered by investors, both individual and institutional.
One attractive candidate in this sector is Validus Holdings (VR), a stock that made its first appearance in a Cabot publication on December 22 when it earned a spot in Cabot Top Ten Report. Here’s part of what Michael Cintolo wrote:
“Headquartered in Bermuda, Validus Holdings was formed in December 2005 with over $1 billion of capital from institutional investors following several natural disasters (including Hurricane Katrina) that increased the demand for re-insurance services. The company is focused on “property catastrophe, property pro-rata and property per risk, marine and energy, and other specialty lines.” Since then, the company has grown revenues every quarter except the most recent, and earned good profits as well. So why is the stock strong today? The only overt changes are the affirmation of a stable outlook for the company by A.M. Best two weeks ago and last week’s announcement that the company would enter the market for “technical lines property,” with a division based in New York and headed by David Hawksby … who until recently was president of the Global Energy Property Division at American International Group (AIG), which is now trading under two bucks. If you’re still holding AIG, you should consider selling and moving to VR.”
I look at Validus Holdings and I see a company that brought in $336 million in 2006, $994 million in 2007, and is poised to bring in $1.2 billion in 2008; fourth quarter earnings will be released on February 12. I also see growing institutional interest; a year ago there were 29 mutual funds invested in the stock–now there are 46.
Finally, I look at the chart, and I see that VR has been beating the market since May. Most recently, the stock has broken out above its August high of 25. It hit new highs on Wednesday. Average trading volume is impressive, at nearly 600,000 shares per day. I think some big investors are selling their AIG, and one stock they’re nibbling on with the proceeds is VR.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: Cabot Top Ten Report uses Cabot’s proprietary screening software to ferret out the 10 strongest stocks each week, no matter what’s happening in the market. Even during this year’s bear market, Cabot Top Ten Report has found winners in stocks like Cleveland-Cliffs, which doubled in four months, Continental Resources, which rose 160% from its recommendation to its peak, and Walter Industries, which rocketed from 42 in January to 112 in early July. Cabot Top Ten Report finds the top stocks of each bull market early in their uptrends and right now, editor Michael Cintolo is busy discovering the market’s next leaders. Click the link below to get started today.