Featuring Lutts’ Logic:
Concerns About the Dollar
Who Can You Trust?
A High-Potential Growth Stock
Today’s letter begins by answering recent questions from several readers, questions that you might have been wondering about as well.
I have been noticing that the market has been moving opposite the U.S. dollar. As the dollar’s value increases the market’s value decreases. I would expect both the market and the value of the dollar to rise in tandem when the U.S. economy is perceived as strengthening, and decrease in tandem when the U.S. economy is seen as weakening. Why would the market be moving opposite the value of the dollar?
Thanks for asking. One of my frequent topics of discussion concerns the fact that the stock market is ALWAYS looking ahead, and that people who try to use TODAY’s fundamental data to invest are doomed to failure. In short, therefore, the market is not moving in tandem with the dollar’s actions of today because the market is looking ahead.
To get into it deeper, the global economy is enormously complicated. In addition to the value of the dollar versus something (the something you’re looking at), there’s also the value of the dollar versus other things (other currencies and hard assets like copper and gold). Then there’s our federal debt, the perceived intentions of the Federal Reserve, corporate earnings, the likelihood that consumers will resume spending, swine flu, the growth of China, the cost of the in-process health care bill etc., etc.
To sum up, you shouldn’t focus on just one metric … but if you do focus on one metric, it should be a stock’s price chart because THAT reflects all those other factors, as perceived by the actual investors with skin in the game … and they’re the ones who matter.
Why are the vast majority of your Cabot Stock of the Month Report picks in a currency that is gradually losing value? It does not make good business sense.
Example: Since the early 1970s, the U.S. dollar has declined from buying 4.32 Swiss Francs. Today it buys 1 Swiss Franc. More recent example. Just a few years ago, 85 U.S. cents would buy 1 Euro. Today you need $1.50 to buy a Euro. You get my point?
It would make more sense to look for stocks of the month in countries with strong currencies and exceptional growth. The USA does not fit the bill. Otherwise, it appears that you are playing to the home crowd.
Thank you for writing. I get your point. But there are far more factors involved in selecting attractive stocks than the strength of a country’s currency. The U.S., despite all its well-publicized troubles, remains the most entrepreneurial major economy in the world. Thus many of the best growth stories in the world are found here. For companies growing at double and triple-digit annual rates, a little currency loss is no big deal.
You will, of course, note that Cabot Stock of the Month Report also has recommended a number of Chinese stocks, and if you’d like more of these, I recommend Cabot China & Emerging Markets Report, which also features stocks from Brazil, India and Russia.
But back to the question of the dollar. In my experience, when everyone thinks alike, everyone is likely to be wrong. It seems to me that we may be nearing the point where everyone assumes the value of the U.S. dollar will keep declining. When we reach that point of perception, the downtrend will end.
There are many, many e-letters like yours. I’ve been told by the “smart people” that picking stocks that are recommended in letters and newsletters sent through email is a bad idea. They say it’s done to bring a stock up in price beyond what it’s worth so you can sell shares that you already have. I really would love to trust you guys. Would you comment on that?
Certainly. Many small operators do indeed like to use press releases and pseudo recommendations in an attempt to push up stocks that they own … or that their clients own. In fact, if you get these promotions in the postal mail, I recommend that you look at the fine print; postal regulations require that the mailer disclose how much they were paid by the promoter to push the stock.
We don’t do that. Never have, and have no reason to.
Our core products are the nine investment advisory services that we sell to tens of thousands of individual (and professional) investors all over the world. The oldest is the Cabot Market Letter, published continuously since 1970. (I just calculated that I’ve had a hand in more than 700 issues of the Cabot Market Letter.) Subscribers who find value in these newsletters renew their subscriptions, and I’m very happy to serve them.
This Cabot Wealth Advisory, contrarily, is free, and you’re smart to be concerned about the value of something free. Free often implies a “catch,” or an ulterior motive. Well, my ulterior motive is simply this; I’d like you to become a paying subscriber to at least one of our newsletters. To persuade you to consider that, I offer valuable content in this free letter and then promise that you’ll get much more in the paid newsletters.
Now, you don’t have to buy anything. You can keep on reading these Cabot Wealth Advisories just as long as we keep sending them, and I won’t mind. I happen to think the content in them is valuable, especially considering the price.
But I will point out that there is a certain lack of continuity to the recommendations found here in Cabot Wealth Advisory. For example, last week I recommended Dr. Reddy’s Laboratories (RDY), a big Indian pharmaceutical company focused on the global generic drug market. The stock is acting well, and I’m optimistic that efforts to control health care costs will lead to a bigger market share for generic drugs.
But I may not mention Dr. Reddy’s Laboratories here again, so if you bought based on that recommendation, you’re on your own … and knowing when to sell can be even more important than knowing what to buy. So if you want to be kept up to date on the stock, I recommend that you take a subscription to the newsletter that originally recommended it, Cabot Top Ten Report.
Subscribers to Cabot Top Ten Report not only get a recommended buying range for each of the 10 stocks that appears in every Monday’s issue, they also get follow-up tracking in every issue, so they know whether to buy, sell or hold.
Note: These Top Ten stocks are hot! For all Cabot Top Ten recommendations from January 1 through September 28, the average one-month return works out to a 38.9% compounded annual return.
For all Cabot Top Ten Report recommendations from March 1 (the market bottom) through Sept 28, the average one-month return works out to 76.3% compounded annual return.
Moving on to today’s market, the long-term trend remains up, and it appears as though the intermediate-term correction of the past month MAY be over. Yes, I know the Dow hit a new high today, but the Dow’s not the market. I wrote last week about the DIVERGENCE that develops as bull markets mature, and today’s market behavior is textbook. Don’t be fooled.
But don’t be dissuaded either. If you’re in the mood for buying, you should take a good hard look at growth stocks hitting new highs.
One I like a lot is Fuel Systems Solutions (FSYS), which was recommended back in August by Cabot Green Investor. In that issue, editor Brendan Coffey wrote the following.
“Fuel Systems Solutions makes the equipment and systems that convert a traditional engine to one that can use CNG, LNG or propane or to an engine that has the option to use either CNG, LNG, propane, diesel or gasoline on demand.
“Fuel Systems grew out of a 50-year-old California company called Impco, which focused on industrial equipment and stationary power, and combined last decade with Italian competitor BRC, which focused on light vehicles.
“Fuel Systems sells to the aftermarket for individuals or companies that want to convert existing engines to use natural gas, and to the original equipment market (OEM), tweaking automakers’ cars and trucks to use CNG or LNG before they are delivered to dealers. … Whether OEM or aftermarket, conversion work involves adding equipment under the hood and replacing or installing additional fuel canisters that store the alternative fuel. Fuel Systems customers include Fiat, Opel, Ford and many other major automakers, none of which account for more than 10% of revenue.
“The company has manufacturing facilities in California and northern Italy, and maintains sales offices in the major CNG and LNG consumer regions, Europe, Australia, India and Pakistan chief among them. In Pakistan, for instance, the relative cheapness of natural gas versus oil means only the elite have cars running on gasoline. In Europe, a desire to reduce air pollution steers consumers to natural gas, as does the European union mandate to get 20% of all vehicles running on fuels other than petrol or diesel.
“The big story for Fuel Systems is the potential of the American market. About 80% of revenues each of the past three years have come from outside the United States … a potential boon is a bill introduced by Senate majority leader Harry Reid of Nevada to provide tax incentives to buyers of natural gas vehicles, a plan that has gotten a lot of vocal support from oilman T. Boone Pickens, who owns the majority of natural gas fueling station chain Clean Energy Fuels.
“The bill would boost the tax incentive to natural gas vehicles to as much as $12,500 per vehicle and to $100,000 for natural gas fueling stations. The bill is certain to pass, if the number of its co-sponsors (77) is a reliable indicator, although it may not be addressed until after health care in September. The House of Representatives passed a bill earlier this summer authorizing $150 million to research natural gas vehicles.”
Well, today the bill has not yet passed; the House has been busy with the health care bill and other matters. But Brendan’s subscribers don’t mind. When he recommended the stock back in August, it was trading at 30. It hit 37 in September, and then marked time for a while, letting its 50-day moving average catch up.
Late October brought a sharp dip below that moving average, shaking out weak holders, and then last Thursday the company announced excellent third quarter earnings results and the stock gapped up to new highs on seven times average volume, hitting 45. And since then it’s kept climbing!
We know from experience that stocks that gap up on earnings on heavy volume tend to keep running and that’s what FSYS has done. You could still buy it here, though downside risk is clearly bigger than it was a week ago. Or you could take a no-risk trial subscription to Cabot Green Investor and buy Brendan’s NEXT recommendation, which comes out this week.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: One of the keys to successful growth stock investing is this: You must be early, before the crowd. So now I’m telling you, Green investing is just heating up, and if you want the best advice on investing in Green growth stocks, you should listen to Brendan Coffey. His latest issue, published just this week, recommends two stocks. I’ll wager most of my readers have never heard of either one of them. But while the mass media is running headlines about big old has-beens like General Motors, Bank of America and Conde Nast, investors in these up-and-coming growth companies are getting rich. And I want you to get rich with them. Click below to get started now.