Avoid Rear-View Mirror Investing
The Market Can Be a Bad Teacher
Strong Stock that’s Leading the LED Revolution
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I wanted to start today by writing about anything other than snow. Anything else. Any ideas? How growth stocks act during their runs, you say? Yes, that’s a good idea-it’s not blizzard-related so I’m all for it. Let’s get started.
In all seriousness, today I want to write a bit about “rear-view mirror investing,” which is something that afflicts all of us because, well, we’re human. The issue is just what it sounds like-investors act based on what they’ve seen in the past (the rear-view mirror), instead of what’s happening in the present or may come in the future.
For instance, in 2013, the market was very bullish and very “trendy,” with many stocks advancing for months at a time, hitting higher highs and higher lows during that period. The charts didn’t exactly show 45-degree angles, but they were close.
So what did most people expect in 2014? A trendy year … and we got the opposite! You’re not going to find many years that are choppier than 2014, especially for growth stocks, with eight or nine moves up and down for four to six weeks.
So what do you suppose most are thinking 2015 will bring? Well, more choppiness … because that’s the environment we’ve all lived in for many months. And with that belief (conscious or not), investors will adjust how they handle a stock-they’ll tend to book profits quickly, sell on the first hint of any weakness and buy only on dips.
I’m not making predictions for this year-for all I know, the chop will continue. But if it does, we know there’s not going to be much money made … so why not prepare for a trendier year and how you should handle that?
On that note, I present the chart below-it’s of Celgene (CELG) during its rally in the second half of 2013. (I originally used this slide at our Cabot Investors Conference last August.) You can see that during this time period, the stock rallied more than 50%. Yet, despite that big gain, it had six pullbacks of at least 9% and had a couple of periods where it made no net progress for a month or two.
Such action is hard enough to hold through even if you’re optimistic and bullish; if you have a preconceived notion that a stock can only go up 10% or 15% before falling down, there’s no way you’re going to hold on through all those pullbacks and shakeouts. Zero.
My point here is very basic: With the calendar having flipped and with earnings season underway, keep an open mind … it’s best not to put limits on your potential profits once you start landing a few winners. It’s good to remind yourself to think big, even after last year’s chop-fest.
As for the current market, I’m intrigued by what I’m seeing-despite a torrent of worrisome, uncertainty-creating headlines (plunge in oil prices and junk debt, Europe’s economic slide, China’s slowing GDP growth, Switzerland’s currency move, the Fed’s potential rate hikes mid-year and, this weekend, Greece’s election of a strongly Left government), the major indexes have been able to hang in there, and a ton of stocks are setting up.
Granted, no money has been made (unless you’re jumping in and out every two days … but that’s not my style), but the recent resilience among many growth stocks has me intrigued, if not encouraged.
Bottom line: If you don’t have a shopping list ready in case the market gets going, you should make one now. Of course, it’s possible the market rolls over, and in that case you won’t be buying anything. But it’s good to be prepared.
The trick with many resilient names, of course, is that most are set to report earnings during the next couple of weeks … and, if you’ve followed me for any length of time, you know I’m not a fan of diving in right ahead of earnings. I’d rather hit the craps table.
Thus, I divide my watch list into three categories-firms that have already reported earnings during the past couple of weeks; those that are set to report within the next three weeks or so; and those that aren’t reporting for another month or more.
Today, I’ll give you a stock that’s already reported its number and hit new price highs because of it. And the story is great, too-Acuity Brands (AYI) is a leading lighting supplier for commercial, industrial and residential use, and its growth is being driven by the surge in demand for longer-lasting, more efficient LED bulbs. Here’s what I wrote in Cabot Top Ten Trader on January 19:
“LED bulbs always seemed like the big idea that was going to take the lighting industry by storm, but the providers of that technology never quite hit it big (Cree is a good example), as competition ate into margins and prices. Instead, the sellers and outfitters of those LEDs-like Acuity Brands-have been the big beneficiaries. Acuity makes all sorts of lighting systems for any customer (residential, commercial and industrial), and is the only pure play on the long-term shift toward LED lighting solutions (which saves money over many years) in North America; it’s also thriving as a result of networked lighting solutions, where, say, a customer can dim the lights with his smartphone. Still, while the overall lighting industry is growing at a mid-single digit pace, LED sales are driving Acuity’s business-in the firm’s just-reported second quarter, total sales rose a decent 13%, but sales of LED luminaires were up about 75% from a year ago, and made up about 42% of total business. That’s obviously the growth driver, and it’s causing profit margins to expand (8.9% last quarter, up from 7.2% a year ago) and earnings growth to swell (it’s been accelerating during the past two quarters). It’s not revolutionary, but analysts see earnings growth remaining strong for the next couple of years as the LED revolution continues.”
Like many growth stocks, AYI had a great 2013, a big correction during 2014, and was sitting near its March 2014 price peak when earnings were reported earlier this month. The result: Shares leapt to new highs on good volume and, importantly, have held those gains despite the still-shaky market. I think you could nibble on the stock around here with stop in the mid-130s.
However, by taking a risk-free trial subscription to Cabot Top Ten Trader, you’ll receive further updates on Acuity Brands and additional strong stocks with high profit potential. Despite market’s recent volatility, we’re starting to see some growth stocks perk up. Cabot Top Ten Trader will help you get in on the ground floor of the future market leaders.
Chief Analyst, Cabot Market Letter
And Cabot Top Ten Trader