What Not to Worry About

Thanks Veterans!

Four Things Not to Think About

Cloud Computing Again?

First off … just wanted to say a big Northeastern thank you to all the soldiers, past and present, who have served the U.S.  It’s easy to get caught up in the day-to-day movement of the market, but it’s important to remember those who sacrifice for all of us and make such things possible.  Thank you!

On to stocks, I want to spend some time today writing about four things that don’t matter when deciding which stocks to buy, which ones to sell and when to sell them.  I’ve touched on some of these topics before, but have gotten a flood of questions recently and figured now’s a good time to clear some things up.  Here we go …

INSIDER SELLING:  When most people hear about insider selling, they immediately think the worst.  Specifically, most young growth stocks have oodles of insider selling, and so the question arises, “If the top brass is selling X million shares, why should I be buying?”

But the real question you need to ask yourself is “Does insider selling have any correlation to future stock performance?”  As far as we’re concerned, the answer is no.  You see, many young, dynamic growth stocks throughout history have had a ton of insider selling on the way up.  The reason?  Lots of these management types take less salary and get rewarded with options and restricted stock, so when the opportunity comes to cash in, they do so. Many actually have prearranged selling schedules.

Either way, the fact is that just about all of the big winners of market lore have experienced a bunch of insider selling during their major moves up.  Sure, there have also been some stocks that crashed and burned after a lot of insider selling, but that’s the point—there’s no consistent correlation between insider selling and stock performance.  

I rarely even look at insider selling when researching a stock, preferring to focus on institutional ownership trends (i.e., whether mutual funds, pension funds and other big investors are building positions), which is what really counts.

STOCK PRICE: This one comes up again and again.  If a stock is priced at, say, 300 dollars per share, most people will avoid it because they can’t buy many shares.  Thus, many investors specifically hunt for stocks within a certain price range—say, between 20 and 40, or something like that.  But that’s a big mistake.

The fact is, the price of the stock means nothing; stocks move in percentage terms.  Said another way, a stock like Google, priced north of 600, can easily move 15 or 20 points in  a day, whereas a stock like Rovi Corp., priced around 50, has a good day if it’s up a point and a half. So owning fewer shares of Google can be just as profitable.

Again, it’s not a matter of favoring higher-priced stocks as much as it’s a matter of not caring much what the price of the stock is … assuming it has solid sponsorship and, of course, a great story.  Early on in a bull market, many of the best names might trade at 20 or 30 because the prior bear market dragged everything down.  At a time like now, 18 months into a bull move, the best stocks might be north of 100.  

I can say that, for whatever reason, many of the bigger winning stocks of the past couple of cycles have come from relatively higher-priced stocks.  Maybe that’s because fewer companies are splitting their stock, or maybe it’s just a coincidence.  I don’t know.  But I don’t have to know because the price of a stock isn’t a main determinant of its performance … so I generally ignore it.

One last note on stock prices—so many investors are obsessed with stock splits, thinking it’s a good thing.  But I can tell you that, historically, a stock often begins to correct, or tops out altogether, after a split (especially a big one, like 3-for-1 or larger).  I actually prefer to see my stocks avoid splits, which usually gives them a longer lifespan.

SEASONALITY:  It’s true that, at times, you can gain a small edge in the market because of seasonal tendencies.  Heck, I’ve even written about the four-year Presidential cycle, and how from the low of the midterm year (2010) to the high of the following year (2011), the average Dow gain is 50%!  It helps give us a big-picture view of the market environment.

However, there’s a big difference between having a background view based on the calendar and taking a bunch of action because of it.  This year, for instance, I heard the usual catcalls in late August about how September is by far the worst month of the year for the market.  Except for this year!  The market surged about 10% in September, kicking off its major bull move.  Selling a bunch of stocks in late August was the exact wrong thing to do.

One investor I’ve read refers to seasonality as providing a gentle breeze at the market’s back (or in its face).  But that’s about it.  If making money based on the calendar was that easy, we’d all be rich … yet that is not reality.  

PRICE TARGETS:  If you have a proven value investing system, then using target prices makes sense.  But I’ve received a few emails that go something like “XYZ stock just surpassed the average analyst target price of 31; should I sell?”  Our answer:  No!

It’s not the analysts whose opinions matter, it’s the big investors that control trillions of dollars that matter.  And if they’re buying hand over fist, that means they’re anticipating business being even better than many optimistic scenarios from the analysts!

Remember, analysts don’t have crystal balls.  Many do good work, but their estimates of what stocks are worth are just their opinions.  And the only opinion that counts in the stock market is, well, the market’s own opinion!

This also applies to analyst upgrades and downgrades.  Lots of investors obsess over such chatter, and yes, sometimes it affects the stock longer-term.  But plenty of times it doesn’t!  Thus, we wouldn’t spend much time focusing on other people’s opinions; focus on the market and the stock instead.

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For my stock pick today, I’m going with an old favorite that looked like it was toast a few weeks ago … but now shares have begun to round out nicely and could (emphasis on could) be near the start of a new upleg.

I’m talking about Salesforce.com (CRM), which is a blue-chip play in the cloud computing space. Actually, the company is more “the next Oracle” in that it continues to deliver innovative software products to its thousands of corporate customers.  

And, of course, all of its products are delivered on-demand, so there’s no need to install or continually upgrade at every users’ terminal; Salesforce does that centrally, and the programs are accessed over the Internet.  That’s the nature of cloud computing.

The stock has had a very long run-up during the past year, and it initially got off to a good start when the market got going in early September.  However, as it turned out, the stock’s inability to correct and consolidate much during the market’s spring correction (from April through August) meant that there were still lots of weak hands owning shares.  And when that happens, a trend change can be on the horizon.

Sure enough, CRM plunged through its 50-day moving average on huge volume in early October; for any prudent investor, that was a signal to at least lighten up, if not bail completely.  But the prudent investor also keeps such a stock on his or her radar screen—sometimes these leaders can re-base after such a decline, and that’s exactly what Salesforce.com appears to have done.

All told, the stock fell from 124 to 98, but is now sitting around 115 on light volume, in the seventh week of a basing structure.  The company is set to report earnings next Thursday evening, and my guess is that if (but only if) CRM can power above 120 following its earnings report, the stock could have a good run in it.  An adverse reaction, however, would likely put in a more meaningful, longer-term top.

So what’s my prediction of what CRM will do?  Nice try!  I don’t predict because I don’t need to.  I think it’s best to keep an eye on the stock and to take a stab at it if you see a powerfully bullish reaction to its report next Thursday evening.

Until next time,

Michael Cintolo
For Cabot Wealth Advisory

P.S.: Michael Cintolo is VP of Investments for Cabot, as well as editor of Cabot Market Letter, a Model Portfolio-based newsletter of the best leading growth stocks in the market. Thanks to top-notch stock picking and market timing, Mike’s simple to follow and concentrated (no more than 12 stocks) portfolio has crushed the market by 15.4% annually since the start of 2007! If you want to own the top leaders in every market cycle, be sure to give Cabot Market Letter a try by clicking HERE.


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