An Emerging Blue Chip in the Software Industry

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Make a Decision … and Live With It

An Emerging Blue Chip in the Software Industry

On January 26, Luca Cintolo entered the world, with 10 fingers and toes, a healthy scream and a very pleased Mom and Dad. In the two and a half weeks since then, we’ve re-immersed ourselves in all things newborn; with our first child nearing three and a half years old, we had to wipe away the caretaking cobwebs and reacquaint ourselves with pack-and-plays, baby swings and rockers, diaper changing, poop analysis (not a joke!) and so on.

The most important thing is that, from where we stand today, all is well. Please don’t read any of the following as a rant or complaint—we know we’re lucky to have a great, mostly happy boy who is putting on the pounds (well, ounces anyway) and generally allowing us to get enough sleep most nights.

But does that mean every day is smooth? Of course not!

I’m not sure what it was like in the old days, but today, there are so many opinions/data available on every major and minor baby ailment that it makes my head spin. Just in the past 10 days, we’ve had three blood tests for bilirubin (none were alarming … but the first two weren’t good enough for the “all clear”), a bunch of weigh-ins (he got back to his birth weight last Friday), then we discovered a food allergy (my wife was like a diaper detective for a few days there, before the doctors finally tested it), so we switched to formula … which then caused his backside to become irritated. So we switched to another formula … which, within one day, made him constipated.

Each of these hiccups, so to speak, has caused us to dig into the details. When the doctor said his bilirubin levels were 13, we knew it wasn’t terrible (otherwise they’d have called us in), but was it good? OK? On the right track? So we head to the Internet to find out. Same for his diapers—I won’t get into all the details of that but whether it was color or texture, we wondered whether his tummy was OK. And now, of course, with the irritated backside; is it from the formula? What can we do to lessen his discomfort? And is it indicative of another allergy or something of the sort? Between the Internet and a few phone calls to a nurse hotline, it seems we’ve been researchers as much as caretakers.

There is just so much information (or opinions)! The doctor says one thing, your mother says another, your mother-in-law another, your wife has a gut feeling, and Jane Doe in some online message board claims something different!

With all that said, our combined stress level is fairly low. Why? Because, having already gone through the newborn-raising process, we realize the key with all of this is simple: You have to collect some information, make a decision, and then live with that decision. Simple. Not that you can’t change your mind a day or two later, but inaction and indecision is just not an option when your 10-day old is crying at 2 am!

I thought about all of this, ironically, when I got back to work last week. My email inbox was full of questions that, really, have no right and wrong answer—stuff like “What should I do ahead of earnings?” or “How big of a position is OK in stock XYZ?” And there were also some questions that had to do with ancillary things like insider selling or an article someone had read online; subscribers wanted to know if that was a sign to sell.

You see, when faced with uncertainty (especially as the market was pulling back sharply two weeks ago), most people dig deep in search of surety … any morsel that will tell them what the right thing to do is. In life, that can often work just fine, but in the stock market, too much digging will simply leave you in a bigger hole.

As with the above baby-related issues, I do try to be aware and read a lot of stuff, both online and in print. That goes for fundamentals—a Chinese economic report, or some insider-selling statistic—and many technical factors, like support/resistance on some major indexes, sentiment or where the stochastics are on the chart.

However, the key is, while I am aware of most things, I only act (i.e., base a decision) on a few things. Got that?

Personally, I have no use for things like RSI, Bollinger Bands and MACD on charts, or for what some talking head said on TV. I’m not saying these things are completely worthless; many investors use them to some degree. But for how I trade, they don’t affect my buy-sell-hold decision.

Really, it’s all about striking a balance. We all know that, if you wanted to, you could research a company for weeks on end and still have more to dig into—paralysis by analysis. In the market, as with a newborn, the key is to collect as much relevant data as you can in a brief period, and then make a decision! Oftentimes there’s no perfect answer, but as long as you have a generally sound system (loss limits, don’t have all your eggs in one basket, etc.), you’ll likely be acting in a way that puts the odds in your favor.

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I (and all of us at Cabot) aren’t big on hedging our advice—yes, I’ll bring up some things that could go wrong or right, but generally speaking, I simply tell you what to buy, when to buy it, and then when to sell it. And I think most everyone appreciates that; right or wrong, I’m giving my best advice, and it’s not hard to figure out whether I’ve done a good job or not.

Today, though, the market environment is a bit confusing. I see lots of encouraging signs—first and foremost, the longer-term bull trend remains in effect. Second, many growth stocks are acting well (many buoyed by earnings reports), and the growth-oriented Nasdaq is by far the most resilient major index. And third, my intermediate-term trend indicator (we call it the Cabot Tides) just flipped back to the bull side, telling us the recent dip might have been one big shakeout.

However, it’s a fact that much of the broad market suffered sharp breakdowns during the selling wave two weeks ago … something that doesn’t usually lead to an immediate sustained rally. We see that in the new-high list—even though the Nasdaq nearly reached virgin turf this week, the number of stocks hitting new 52-week highs was less than half what it was in January.

Moreover, my (very) informal gut feel is that most investors are still complacent—they’ve been “trained” by the market during the past year to expect 5% to 7% corrections and then a resumption of the rally. Seeing as how the market serves to disappoint the majority, another leg down, or more choppy action, is possible.

Guesswork aside, my system tells me it’s fine to hold onto strong stocks, and the latest Tides buy signal says putting some of the sidelined cash to work is advised. Remember, in our methodology, judgment is vital, but we try not to believe everything we think—we follow the system, which tells us to buy a couple of stocks.

But which stocks? Ones that are strong! I don’t have much interest in names that got killed, trying to play them for a bounce. Instead, I want to see which stocks held up well during the brief selling wave and are now perched at or near new highs.

One of those is ServiceNow (NOW), a stock that I’ve followed in both Cabot Market Letter and Cabot Top Ten Trader for many weeks. Here’s what I wrote about it in Top Ten this week:

“Large companies need help handling their IT infrastructure, and ServiceNow is emerging as a trusted partner in that area. The company’s Cloud-based software keeps work flowing, consolidates data, automates the administration of new computers and lets the IT department monitor activities. ServiceNow’s software is sold on a subscription basis and its number of subscribers topped 2,000 for the first time in Q4. It also boasts a subscription renewal rate of 96%, making for excellent recurring revenue. The company has been featured in Top Ten five times since it came public in June 2012, and today’s appearance comes courtesy of a Q4 earnings report that featured a 67% jump in revenue. The two cent loss in EPS was above the forecasted 1 cent, but investors don’t seem to mind. The quarterly report prompted positive notes from four different analysts who noted that the company’s estimates for Q1 and full-year 2014 revenue were well above analysts’ projections. The company’s expansion of its product offerings to include human resource automation also came in for positive comments. ServiceNow is taking market share away from big companies like CA Technologies, HP, IBM and BMC Software, and investors are taking note. Not even last Friday’s patent infringement accusations from HP have made a dent in investors’ opinion of ServiceNow.”

Shares have broke out of a two and a half month pause in early January, pulled back with the market but then popped on earnings. It’s since been consolidating, and while I expect volatility to be high, I think NOW is buyable around here with a loose stop near 58 or so.

To learn more about additional stocks that I’m following in Cabot Market Letter, click here.

To learn more about stocks featured in Cabot Top Ten Trader, click here.

Working to make you a better investor,

Michael Cintolo
Chief Analyst of Cabot Market Letter
and Cabot Top Ten Trader

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