Most of us didn’t buy Apple (AAPL) when it was trading at $2 a share. Or Amazon (AMZN) at $5 a share. Or even Tesla (TSLA) at $20 a share. Those are the types of early-stage investing opportunities that can change your life. And endeavoring to discover the next life-altering growth stock is why our Tyler Laundon has launched our new Cabot Early Opportunities advisory.
Already chief analyst of our Cabot Small-Cap Confidential advisory, Tyler wanted to broaden beyond the limited (yet highly profitable) scope of small-cap stocks. Cabot Early Opportunities is more all-encompassing, leaving no stone unturned in search of stocks that are in the very early stages of what could be, if the stars align, an Apple- or Amazon-like rise.
To learn more about this new advisory, and Tyler’s approach to unearthing the best early-stage investing opportunities, I decided to ask Tyler myself.
Here is our conversation:
The Keys to Early-Stage Investing
Chris: Tyler, you already run Cabot Small-Cap Confidential, our small-cap stock advisory. How is Cabot Early Opportunities different?
Tyler: At a high level, the inspiration for this new product came about because I do all this research into so many stocks, but only get to share a limited number each month in Cabot Small-Cap Confidential.
Over time I’ve felt like there’s a lot of research not getting out there to subscribers. But the challenge has been that Confidential is going well in terms of portfolio returns and subscriber satisfaction. And the intensely focused nature of the advisory service is well matched to larger, long-term holdings in ultra-high conviction stocks.
We didn’t want to mess with something that’s been working for us, and for subscribers. So, we launched Cabot Early Opportunities to house some of this new research in a very consumer friendly package and at a very reasonable price point.
In terms of my stock research process, I run through essentially the same process that I use for Confidential. But I broaden it to pull in a wider variety of ideas over a wider market cap range, including both early-stage mid caps, small caps, micro caps and penny stocks too. Essentially, these are some of the opportunities that are either a little too conservative and/or a little too risky for Confidential. This way subscribers get a nice variety of early-stage growth stocks each month.
From there I take each stock through roughly the first half of the research process I use for Confidential, looking at things like story, revenue growth, EPS growth, and the business model. But I don’t go into nearly as much depth as I do with Confidential. Cabot Early Opportunities subscribers receive easy-to-read research that’s not as hard hitting as the institutional quality research reports that Confidential subscribers receive.
This is fitting with Cabot Early Opportunities being more of an idea generator advisory service that covers stocks you won’t find in many other places. Confidential does that in slightly different ways and is more of a tightly managed, high-conviction small portfolio. My hope is that they work very well together.
Chris: What types of companies are you looking for – and can you give examples of early-stage investing winners from the past?
Tyler: I tend to focus on companies that are delivering 20% or greater revenue and earnings growth and range in market cap from $50 million to $10 billion, across the technology, health care/biotech and consumer sectors. And I favor those that have a business model that I understand and that positions the company for long-term success. That said, I also like to find outside-the-box ideas, such as the occasional oil and gas exploration company.
In terms of previous examples, years ago we did very well with Ambarella (AMBA), Allot Communications (ALLT), and Africa Oil (AOI.TO), all of which delivered returns in the 400% to 600% range. More recently, we’ve had success with names including Rapid7 (RPD) and AppFolio (APPF), which have delivered gains between 100% and 220%.
Chris: At Cabot, we have a history of staying away from IPOs (initial public offerings) and penny stocks. But you plan on recommending both in CEO, correct?
Tyler: Yes, I do, with some very important qualifications. In terms of IPOs, what we’ve typically seen in recent years is that IPOs initially pop, then fall and don’t do a heck of a lot until lockup expiration has passed. Knowing that means we can evaluate recent IPOs with eyes wide open and a healthy perspective that balances the story versus the stock. The ultimate goal is that I want to let subscribers know what I think are the best IPOs, and when it’s time to step in and buy, whether that’s three, six or 12 months after the company goes public.
In terms of penny stocks, yes, I intend to offer coverage on the best ones I see out there. This isn’t a place for the faint of heart to invest, that’s for sure. But at the same time, a lot of growth investors have that itch to buy a few speculative stocks. They just need a little guidance to find legitimate companies with big potential. My intent is to give them that confidence by focusing only on those penny stocks that pass my quality screening criteria.
Chris: Does the uncertainty that exists in today’s marketplace – with growth stocks and recent IPOs taking it on the chin while the market as a whole has been running in place for five months – make it easier or harder to unearth these early-stage investing opportunities?
Tyler: There are always great companies out there, but the potential isn’t always reflected in the share price. My job is to navigate through all the noise and focus on the opportunities that balance story, potential, share price and broad market conditions all at the same time, and present those to subscribers in a timely manner.
Investors tend to think that risks are comparatively lower when stocks are going up. But that’s not always the case. Lower share prices can reduce downside risk because they represent a better value. It’s all very contextual and stock specific, and there are so many moving parts that there is no golden rule or silver bullet to consistently find winners, in either an up or down market. You just need to try and focus on what matters most and balance potential with skepticism and fear, and put that all into the context of current market conditions.
Chris: Given that these early-stage stocks presumably come with a greater degree of risk, what sell strategy would you recommend?
Tyler: I typically recommend selling a stock when it’s fallen 30% from our entry point. We won’t always wait for that level, but that’s where the line is drawn. In terms of trailing stops, that’s totally situational and depends on whether or not partial profits were taken on the way up, as well as other factors.
Chris: What is your overriding hope for what people who sign up for Cabot Early Opportunities will learn or take away from it?
Tyler: I’d like subscribers to learn about interesting, high potential early-stage stocks that they have the confidence to invest in and which deliver on their return expectations. And I’d like to deliver that research in an entertaining and confidence-inspiring manner that makes subscribers look forward to every Issue.
If you want to sign up in time for the next issue, click here.