A few times a year I will get a phone call from a subscriber who has read a news story about some shortage or disaster and wants to know how to “play” it ... right now! Calls like this spiked after Hurricane Katrina as callers thought they could buy Caterpillar or Home Depot or some engineering company that stood to benefit from the massive reconstruction effort that was supposed to follow. I think there was even one call asking about investing in manufactured housing.
It’s possible that a few of the people who called after Katrina might even have made some money on their attempts to play the opportunity. But most of the money was made by people who took the time to do their due diligence and bought companies that rose for months after the disaster. As usual, calm analysis and intelligent buying proved to be more important than lightning-fast reflexes.
Of course it’s tempting to see a big news story (or even a small one) and to try to figure out if there’s a company or industry that will benefit. The quick spikes in the stocks of companies that are affected by news stories benefit only those who are quickest on the trigger. By the time a news story makes its way into an evening newspaper, much of the smart-money surge has already taken place.
I remember reading a story years ago about a legendary Wall Street tycoon who got up very early every weekday and had his chauffeur drive him to the printing plant where the Wall Street Journal was printed. He got there just as the first edition was produced, and read that hot-off-the-press paper on the way to his office. By the time he got to work - while most of New York was still asleep - he had a clear picture of the news stories that would be moving the markets later in the day. He got his buys and sells in for execution when the markets opened. And that - in the days before CNN - was how he made his fortune. Unfortunately, globalization and the 24-hour news cycle have eliminated the little information lag that he exploited so profitably.
One other phenomenon that makes it hard to play events is chaos theory. It’s easy to draw a straight line in your mind from a news story to a company to a profit. But in reality, that’s a really twisted path, and chaos theory tells us that the complexity of outcomes increases so rapidly with each additional step, that it’s impossible to predict what will happen with any accuracy. Sometimes the obvious companies to benefit don’t have the excess capacity. Sometimes the bureaucracy delays its decisions and then makes the wrong one.
In the final analysis, companies that got the contracts for repairing oil rigs in the Gulf of Mexico probably made the most money for investors. But Caterpillar was too big to get much of a boost, and Home Depot never caught so much as a puff of tailwind.
The most recent call I received was from someone wanting to know how to play the impending global shortage of molybdenum, the silvery-white metal that is both a key ingredient in stainless steel and the hardest of all the elements to pronounce. Moly is also important because it doesn’t expand much when heated and has the sixth-highest melting point of all the elements. It has other uses that make it handy to have around, but this isn’t the Cabot Molybdenum Report.
The important thing about moly is that there aren’t a lot of companies that mine it that trade on U.S. exchanges. The biggest is probably Southern Copper (PCU), which gets moly as a byproduct of copper mining. And with demand up and supply limited - China has shut down over 300 moly mines as part of an anti-pollution drive - the price of molybdenum has lots of upside potential. But PCU’s copper business is so much bigger than its moly business that a small drop in the price of copper would totally swamp a big increase in the price of moly as an influence on the company’s bottom line.
All of this is just a long way of saying that if you get a brainstorm from a newspaper story about some company that’s in line for a big rocket ride, you might want to think twice, or even three times about it.
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I keep trying to boil the Cabot growth investment approach down, looking for the simplest possible formulation, and I think I may have finally found it. It all comes down to this: Story. Numbers. Chart. I’ve been thinking of adding an “and” before chart so I can call it the SNAC approach. Snacks appeal to me.
Story is the business proposition of the company, the product it makes or the service it provides. This is where we try to get a handle on whether the potential market is big enough to keep revenues and earnings growing, and whether the benefit is big enough to make the products/services compelling, and whether there are barriers to entry that will keep competitors at bay. It also includes the history of a company’s management team, and whether the folks in charge have shown that they have the imagination and discipline to keep a company growing.
Numbers are the fundamentals. For our growth publications we want companies that have a history of growing revenues and earnings (and ideally, earnings faster than revenues). For many analysts, this is the be-all and end-all of categories. Pure fundamental analysts like to believe that they have an advantage over everyone else because they have real numbers to work with. (This is at least partly hogwash, of course, because projections of earnings are built on a shaky framework of guesswork, character analysis and creative thinking, but I’ll let that pass.) The important thing is that the company be making money, preferably in increasing amounts.
Chart is the history of the stock’s price, trading volume and volatility, as reflected graphically in the chart. This is the stuff of technical analysis, about which many books have been written. We’re looking first for a chart that reflects a stock that is becoming increasingly attractive to investors (price going up) ... and then we’re looking for an attractive buy point.
The most important thing about SNAC is that you have to have all three elements in accord to give yourself the best possible odds. You’ve probably heard of people who get carried away by a great stock story that they heard at a cocktail party. Don’t do that.
There’s an element of art, as well as science, to picking stocks this way. But you’d be amazed at how nourishing SNAC can be.
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The investment idea that I’m floating in this issue is just that, an idea. But it’s a big idea. Taleo Corporation is a California-based company, founded in 1999, that’s trying to do two huge tasks: First, get companies the talent that they need to succeed; and, second, reduce the cost of an in-house human resources department.
Taleo uses talent management software that is designed to recruit, manage and develop different classes of employees, from Professional to Hourly to Contingency (temporary). Among other tasks, Taleo’s online programs guide clients through recruiting on campuses, complying with labor laws, and transitioning a new hire from candidate to employee.
Clients don’t buy software to perform these tasks. Taleo’s services are web-based, which means clients pay to use only what they need and don’t ever have to worry about upgrading software.
One measure of Taleo’s success is that it has been used by more than 30% of the Fortune 100 companies, including Bank of America, Fidelity, Sony, Whirlpool, IBM and many others. HR departments are an expensive necessity for most big firms, and if Taleo can provide the service without the overhead, the sky’s the limit.
TLEO has an interesting chart, with a nine-month post IPO base giving way to a steep drop in July 2006. But the stock’s progress from that point has been sensational, soaring from 8 to 32 at the beginning of this month. Since then it’s pulled back to 26 (right around the stock’s 50-day moving average), and that looks like a nice buying opportunity.
Paul Goodwin
For Cabot Wealth Advisory
Editors Note: Paul Goodwin is the editor of Cabot China & Emerging Markets Report.
The recent pullback in Chinese stocks is another great opportunity, not for buying, but for pulling back into cash and waiting for the next big thing in emerging markets stocks to announce itself. By following markets rather than trying to predict them, the Cabot China & Emerging Markets Report has been able to deliver a 90%+ return this year and lead the Hulbert ratings yet again. If you want to build your watch list while we wait for the bulls to run again, think about trying a no-risk trial subscription. The link below will get you started.
