The Top-Performing Stocks

Quote, Wisdom, Endquote

Top Performers

Engines All Ahead Full

Anyone who wants to prove something can always find a quotation from some famous person to back them up. Sometimes the advice is good and the authority of the famous person is relevant. But sometimes not.

As Antonio says in Shakespeare’s Merchant of Venice, “The devil can cite Scripture for his purpose.”

One quotation that constantly irritates me is from that unimpeachable source Albert Einstein, who remarked somewhere that “Imagination is more important than knowledge.”

What bothers me is that the quotation is used by many people to mean that knowledge isn’t important, and that imagination all by itself is all you need to succeed.

Einstein had a great sense of humor, and I like to think that he would regard that interpretation of his remark as distinctly laughable.

He was also famous for his thought experiments, as for instance when he imagined himself sitting on a beam of light and regarding what the rest of the universe would look like when he zipped past. This line of thinking was crucial in the development of his theory of relativity.

But, as I’m sure Einstein himself would agree, if he hadn’t had the solid base of mathematics and experimental physics to provide a foundation, he wouldn’t even have been able to conceive of that thought experiment.

So what we have here is a remark by a highly educated man being used to denigrate the importance of education.

I have always interpreted the saying to mean that knowledge by itself isn’t enough to produce inspiration and innovation. For that, you need knowledge and imagination.

Anyone who wants to take on a big job (like replacing Newtonian gravity with Einsteinian relativity) is going to need a heap of imagination. But unless there’s a big base of knowledge to stand on, the imagination will probably just flutter around like a butterfly.

With all that said, it probably won’t surprise you much that I’m very selective in picking experts whose advice I’m willing to take.

The ideal on the Internet seems to be that one person’s opinion is about as good as another’s. So people with decades of experience and study in a field are treated with no more respect than the idiot next door.

I have enough experience talking with individual investors to know that there are lots of people who regard a stock tip from their brother-in-law as a good basis for investing.

And I’ve spent plenty of time explaining how a perfectly reasonable-sounding investment can drop like the proverbial rock, and why it probably wasn’t a good idea to hold on while it fell from 38 to below 1.

If you’re like me, and prefer your experts to have knowledge, imagination, discipline, experience and street smarts, you might want to consider adding one of Cabot’s investment newsletters to your list of experts.

Cabot’s writers are all experienced investors (and have the scars to prove it). And we’re ready to help you negotiate the mood swings and pitfalls of the market.

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Every year I like to torture myself by looking at the stocks that have booked the strongest performance of the previous year. Now that 2011 is well underway, I thought I’d share my results with you.

In a lot of ways, the list is as mouth-watering as a coffee-table book of high-performance cars, and as useless as buying a lottery ticket.

But it’s a (mostly) harmless way to get a little perspective, to try to figure out what these monsters had in common, and to make up new rules for identifying the strongest candidates for 2011.

What I discovered this year is that your results will be very different depending on how you set your search parameters. One list I found limited itself to stocks that traded above 2 per share at the end of the year and traded a minimum of 50,000 shares a day.

Since I limit my picks in Cabot China & Emerging Markets Report to stocks that trade above 10 per share and 400,000 shares a day, this restriction makes sense to me. There’s no use paying attention to penny stocks if you’re not going to play that game.

Using that criteria, the top-performing stock of 2010 was China Shen Zhou Mining & Resources (SHZ), which notched a gain of 1,083%. China Shen Zhou is unusual among big gainers because after a big rally just as the year opened, it spent the next six months in a significant downtrend. Its gains came in three rallies, in August, October and November/December.

The second-biggest gainer of the year was Cost Plus (CPWM), which followed the more traditional path of big winners by finishing a huge correction right at the end of 2009, then launching into a rally that peaked in May. After a three month consolidation/correction, CPWM got back on its bicycle and rallied strongly again until late December, finishing the year with a gain of 851%.

Third place went to Radcom (RDCM), which was in the middle of a five-month base-building phase a little below 2 when the year began. RDCM blasted off in March, and rallied through to the end of the year, although there were two significant corrections along the way. RDCM booked a 560% gain for the year.

All three stocks have corrected since the year flipped over, with SHZ taking a huge beating due to allegations of misrepresentation.

So that’s the way big gains are made. Start at very low levels, catch at least one big updraft during the year and hold corrections under control. Timing is huge.

Don’t feel too bad that you missed these monster gains. Too much hindsight can make you think that you should have seen it coming, and that’s just not true. Plus, dabbling in very low-priced stocks can be very expensive if things break the wrong way.

If you’d like to have the whole list of the top gainers of 2010, reply to this email and I’ll be happy to send it to you.

And for my next CWA, I’ll run down the biggest losers of the year. That will make us all feel better.

With blood on the tracks today, it’s hard to find a lot of attractive setups for new buying.

But there’s one Chinese company that I’ve had my eye on for a long time, waiting for the chart to settle into a buyable situation. That may just have happened.

Harbin Electric (HRBN) is a maker of electric motors, including rotary, linear and specialty micro-motors. Ninety percent of sales are within China, and revenues have increased by 85% annually for two years in a row. Earnings growth reached triple digits in three out of the last four quarters and the company has virtually no debt. The P/E ratio is an attractive 7.

Those are very good numbers, and the company’s earnings have grown each of the past six years.

But the really intriguing aspect of Harbin Electric is the chart for HRBN. The stock shared in the big 2009 recovery, but topped at 26 in March 2010, and has been trading in a range since October 2009. HRBN corrected to 15 in November, then inched its way back to near 20 in January. Since then, it has traded very tightly, with support at 18. This means it has ignored the overall volatility of most Chinese stocks and resisted the recent downtrend.  

There are two possible catalysts for action in the near future. First, there is an outstanding offer from a private equity firm to buy up the outstanding shares at $24, which is a significant premium to the current price. This proposal is under consideration by Harbin Electric’s board.

The second catalyst is the company’s Q4 earnings report, which will be announced after the close on March 16. Given the company’s stability over the years, it’s likely that the results will meet expectations.

I don’t ever advise buying a full position in a stock ahead of earnings. But HRBN is a solid investment in a stormy market, and positive news on either the buyout or earnings could produce good results.


Paul Goodwin
For Cabot Wealth Advisory

P.S. Paul Goodwin is the editor of Cabot China & Emerging Markets Report, which Hulbert Financial Digest rated as the #1 newsletter for five years in 2009 and 2010. During that time, the Report rewarded subscribers with a jaw-dropping return of 174% (an average annualized gain of 20.5% every year) versus the Wilshire 5000’s gain of 15.4% over the same period. Don’t miss another winning recommendation. Get started today!


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