The System for Choosing Stocks for Cabot Global Stocks Explorer
My system for picking growth stocks for Cabot Global Stocks Explorer is called SNaC, for Story, Numbers and Chart. There’s nothing complicated about it, but it can be very powerful. Just because it’s simple, that doesn’t mean it’s easy to do. Here are the basic principles.
Story includes the basic market proposition of a company, including its products, its target consumers, its potential for huge sales growth, its barriers to entry, its competition, its intellectual property, its management and all the other stuff that you can put into words. When someone buttonholes you at a party and tells you about a penny stock they’ve found that just can’t miss … what you will probably hear is the power of a stock’s story at work.
Story is an attractive way to look at stocks because we’re all trained to react to stories. We like books and movies about people who have great ideas and struggle (against apathy, short-sightedness and malevolence) to gain acceptance (and make a pot-load of money). And we’re attracted to the same things in stocks.
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But there are lots of stocks with great stories that don’t do a thing.
I also want good numbers, which are a factual record of a company’s (and thus, management’s) success. I look for stocks that have been growing revenues and earnings for a number of quarters, ideally with earnings (profits) rising faster than revenues (sales). I like to see the rate of growth for both categories accelerating. It’s also nice to have an increasing number of institutional investors and an after-tax profit margin that’s high and rising. And lastly, I want a stock that’s liquid—trading at 400,000 shares a day or more—so Cabot subscribers can trade without being worried that the stock will get deep-sixed by one money manager who wants out.
Numbers can be comforting because they give you a sense that more and more consumers and businesses are buying a company’s products, and that management knows how to grow profits. Plus, it’s a fact that most of history’s greatest growth stock winners had huge numbers before they catapulted higher.
Charts are where the rubber meets the road in growth stock investing. Some highly technical investors don’t even care what a company’s product is or how much money it’s been making. They think they can tell everything they need just from a stock’s chart. I’m not that confident, but I know that a stock with a rising price and good volume support must be doing something right. When I screen my emerging markets investment universe for candidates to recommend, I’m really looking for stocks that are in demand. And that’s what’s a chart can tell you.
Charts also tell you about a stock’s momentum—whether its rate of appreciation is rising or falling, whether it’s shaping itself into any of the classic patterns of consolidation, reversal or base-building. I’ve sold stocks that were going up steeply because the chart told me it was a climax top. And I’ve bought stocks that had advanced sharply and then corrected into a tight pattern that indicated steady accumulation.
Like almost everyone, of the three components of the SNaC strategy I guess I like story the best. But there is value in all three, and having all three parts—Story, Numbers and Chart—can help to shift the odds in favor of an emerging market stock’s success. The best stocks have great stories, strong numbers and technically attractive charts. In an enterprise that requires you to use every advantage at your disposal to get the odds on your side, it just makes sense to go for the complete package.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More