The Newest Stock on my Watch List

The Tractor Story
 
Healthy, Profitable Food
 
The Networked Toaster?
 

 
Note from Cabot Wealth Advisory Editor Elyse Andrews: Last week, we went you a survey requesting feedback on our recent HTML emails. From the survey we found out that you overwhelmingly want to read Cabot Wealth Advisory in HTML. So starting today, we will be sending the emails in the new format, which will allow us to include pictures, graphics and charts. Thank you to everyone who filled out the survey, your input was very helpful!

When my father published the very first issue of his market letter in 1970, he borrowed the name Cabot from the farm where we lived.  His father had bought the farm in 1941 (the full story can be read here http://www.cabot.net/Content/About-Cabot/History.aspx ) and in 1948 he bought a new tractor to replace the horses used on the farm.
 
The tractor was a Ford Model 8N, perhaps the most popular tractor ever sold. Approximately 524,000 were produced from 1947 through 1952.
 
Here’s a picture of me and my brother Rob sitting on it.  I’m the kid with the curly hair.
 

 
Designed for the small-time farmer, the Ford Model 8N had four cylinders, displacing 120 cubic inches.  It generated 27 horsepower and—more importantly for farmers—92 foot-pounds of torque at 1500 rpm.
 
At Cabot Farm we used the tractor for grading the dirt road, for hauling things and people in the wagon and above all for mowing the fields … not to get a hay crop but just to keep the property clear.  If you don’t mow a field, you eventually end up with a forest.
 
Here’s a picture of me and Rob and our father on the tractor in 1996.
 

 
This photo was taken by a professional photographer hired by Summit Technology, which used it in their corporate annual report.  In brief, we had discovered the stock of the company, which was a pioneer in the laser eye surgery industry, in 1989.  The three of us had our eyes lasered … successfully.  And subscribers who followed our investment advice did very well, selling for a profit of 443% in 1996.  Much later, Summit was acquired by eye-care giant Alcon.
 
But back to the tractor.
 
In 1996, when the picture was taken for Summit, the tractor was still being used for those chores.  Sometimes it sat idle for weeks.  Sometimes, in mowing season, it was used hard several days in succession.  A few years ago, it was given a major overhaul, and in the current mowing season it’s been working as hard as ever.  Like any 62-year-old vehicle, it requires pampering.  The brakes are almost useless.  It overheats on hot days.  And it would rather go downhill than up.  But when it breaks down, mechanically talented family members fix it up.  And in the end, it gets the job done.
 
Now here’s the funny thing.  Even though we live on Cabot Farm, we Luttses are not really farmers, and we don’t know any real farmers.  As a result, none of us has ever driven a tractor newer than our 1948 Ford!  In a way, to us, they don’t exist.  When it comes to farming equipment, we’re stuck in a time warp.
 
We replace our cars like average people, but we keep on using the same old 1948 Ford tractor.
 
Partly it’s tradition.  Partly it’s parsimony.  And partly it’s lack of exposure to the modern-day alternatives.
 
Now, I know the 1948 Ford won’t last forever, but I also know that when it is replaced, we’ll have lost one of the traditions that binds us to the farm, to our past, and to each other.
 
So here’s a question for my readers who are also farmers.
 
Should we keep on using the old 8N, which serves as a reminder of where we’ve come from?  Or should we look at the modern-day alternatives, perhaps lightly used?
 
Send me your answers by replying to this email and if I get enough, I’ll print them in my next issue.
 
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Moving on to the market, I’m optimistic that the bottom of the May-June correction has passed, and that the market is now gathering strength in preparation for a new leg up.
 
I’m optimistic in part because so many people are pessimistic!  I think the unrelenting media focus on the BP oil leak has really skewed people’s perceptions of reality.
 
But I can’t call it a bull market until I actually see major market trends advancing again.
 
Still, I’ve been busy building a Watch List.  Mine currently has 21 stocks on it, and today I’m going to tell you about the stock that’s been on my Watch List the longest … as well as the stock that was added most recently.
 
The graybeard is Whole Foods Market (WFMI), the leading retailer of organically grown food in the world.  Whole Foods is prospering by being what Peter Lynch called a “cookie cutter” company; find a retailing concept that works, and then build more of them, while continually experimenting with tweaks to the formula.
 
It’s a formula that was perfected by McDonald’s (MCD), which is still a decent investment for conservative money.  And Whole Foods, which has grown revenues every year of the past decade and now has more than 295 stores in 38 states, the U.K. and Canada, is following the recipe perfectly.  
 
Its profit margins in the last quarter were 3.1%, obscene for a grocery store.  Its revenues grew 14% from the year before.  Its earnings grew 52%.  And after slowing store development in the recession, management is now expanding once again.  Founder John Mackey, in fact, is one of the smartest, most forward-thinking, most human-focused retailers in the business today.
 
Fiscal third-quarter earnings will be reported August 3 and I have no doubt they’ll be terrific.  
 
Technically, WFMI is attractive here because it’s pulled back to nearly touch its 200-day moving average in recent weeks.  Also, 34, where the stock bottomed last week, is where it bottomed after gapping up after its earnings announcement in mid-February.
 
Long-term, I think it’s a winner.
 
The newest addition to my Watch List is a company that used to be called Network Appliance (which always made me think of toasters), but is now called NetApp (NTAP).
 
NetApp recently earned an appearance in Cabot Top Ten Weekly—-in fact it was named Editor’s Choice-—and here’s what editor Mike Cintolo wrote:
 
“NetApp built the world’s first networked data storage appliance and has been a leader in the industry ever since; 49% of its business now comes from outside the U.S. Increasingly, the business is not just about storing data but about making it instantly available to users of virtual infrastructures or cloud computing networks. Properly implemented, these technologies enable more convenient and more reliable data access with reduced costs. Business in the industry slowed dramatically in the depths of the recession, though NetApp managed to continue growing revenues on a year-over-year basis. And this year the industry has come roaring back; analysts have been increasing their earnings estimates for NetApp for both 2009 and 2010. Furthermore, after-tax profit margins were 15.6% in the latest quarter, the highest in more than four years. Properly managed, this company could go far.”
 
For more details on NetApp and other top stocks, click below.

http://www.cabot.net/info/ctt/cttkb05.aspx?source=wc01
 
Yours in pursuit of wisdom and wealth,
 
Timothy Lutts
Publisher
Cabot Wealth Advisory

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