Stock Market Video
Great Growth Stocks: The SNaC Approach
This Weeks Fortune Cookie
In Case You Missed It
In this week’s Stock Market Video, I look at the uncertain state of the markets right now. The situation isn’t dire, but there’s a major amount of uncertainty out there and investors are jumpy and irritable, which raises volatility. It’s best to hold some cash and keep your buying under control. Interestingly, Chinese stocks that trade in the U.S. are significantly stronger than other sectors.
Great Growth Stocks: The SNaC Approach
In trying to explain the Cabot system for picking growth stocks—especially the approach I use in the Cabot China & Emerging Markets Report—I’ve come up with an acronym. If you have a system, you need to have an acronym!
I call it the SNaC approach.
That means that a great growth stock must have a compelling Story, excellent Numbers and a technically supportive Chart. Story, Numbers and Chart. Cute, ain’t it?
But it’s more than cute; I think it really makes sense. And using it can make you a better stock picker for one big reason: it forces you to look beyond a stock’s story.
The stock’s story is just that. It’s all about the company’s products or services and why the world needs them, or how people have wanted them without even knowing it. A story is about benefits, whether it’s a lower price for familiar goods, saving lives or making them healthier, or offering opportunities for new experiences in games or style or communication. Stories are appealing, even compelling, but it’s not enough to stop there.
Numbers are the fundamentals of a company, including profit and loss, assets and liabilities. People who screen stocks for consistent earnings growth or valuation or their ability to beat analysts’ expectations are fundamentalists.
Charts are a graphic representation of a stock’s reception in the market, and a skilled chart reader—a technical analyst or technician—can get an astonishingly detailed read on a stock’s momentum and likely future action from the patterns of price and volume that charts lay out.
But it’s the story side of things that I’m concentrating on today, because I think humans are trained from birth to appreciate and react to stories.
From the moment we graduate from Goodnight Moon to the stories that begin “Once upon a time” and end “and they lived happily ever after,” we’re hooked. We become connoisseurs of the rise of underappreciated heroes and the downfall of overbearing villains.
So, when we discover a company with an appealing story, especially if the company’s stock has been ignored or punished by the market, we can sometimes get swept away by sympathetic enthusiasm. Lots of investors will buy a stock just to be able to tell the story to friends. (“I have a little piece of this company that makes electric cars …”) Only later will the market teach us that story isn’t enough.
A few years ago, one of my favorite stock stories concerned a small manufacturer called Capstone Turbine. The company makes efficient, environmentally friendly MicroTurbines that burn almost any kind of fuel and generate electricity (from 30 to 200 kilowatts) and heat, which can both heat or cool facilities.
Two elements of Capstone’s story stand out. First, their product has just one moving part, the turbine rotor itself, that’s turned by the combustion of fuel. The vertical turbine rotates at 96,000 revs per minute, turning the generator rotor, which is on one end of the one moving part.
The rotor can turn that fast because it rides on patented air bearings that use no grease or oil. Since they have virtually no friction and don’t get gunked up with grease, the turbines can be used in remote settings where maintenance is difficult.
The second standout element of Capstone’s story is its fuel versatility. The company’s website says that the MicroTurbines can run on low- or high-pressure natural gas, biogas generated by landfills or sewage treatment plants, flare gas from oil wells, diesel fuel, propane or kerosene. Basically, whatever hydrocarbon you have, the turbine can burn it!
I’m not writing about Capstone Turbine in order to recommend the stock. But doesn’t it sound great?!? It’s exactly the kind of story that you could tell a friend about at a cocktail party or over lunch. It’s easy to be enthusiastic because the story is simple and compelling; it looks like a can’t-miss proposition.
Unfortunately, the numbers and the chart aren’t quite so attractive. Capstone has a record of yearly losses that goes back as far as 1998, and maybe farther. And the company isn’t projecting a profit at least through 2014. Without profits, there are no valuation metrics to work with.
The chart is similarly ambiguous. CPST has made some monster moves in the past, including a big run when the company participated in a pilot program with Wal-Mart to determine whether MicroTurbines might be useful in heating and cooling the company’s stores that blanket the American landscape. If that had worked out …
But no. It’s a long way down from 98, which is where the stock was trading back in 2000. Even as recently as June 2008, the stock was at a respectable 4.4. Unfortunately, it took a big move from late May through late July to boost the stock … all the way to 1.5! (It’s since dropped back to a hair over 1.)
This is obviously a cautionary tale. The moral is that really appealing stock stories have the power to knock your judgment off balance. All great stocks have great stories; but not all great stories lead to great stocks.
In stocks, as in life, you need a fully balanced SNaC to give you real nutrition.
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Contrary Opinion buttons here.
Tim’s Comment: If successful investing were a matter of simply reacting logically to public information, the market would be rational. But the market is irrational, because people are always investing based on their perception of what will happen in the future. Said another way, stock prices discount the perceived future. Knowing this, you can see that it’s better to buy a stock at onset of the rumor of good news and sell when the rumor becomes fact (because then investors are looking to the future again).
Paul’s Comment: Right now, stocks are being moved around by speculation about military action in Syria and when the Fed might start weaning the economy. Markets are really just one big human-powered computer for setting the odds on what might happen and anticipating what the results will be. But money is made by taking risks, which is why this market maxim suggests investing in what might happen, then taking profits when it actually happens. The losers will be the ones who tried to avoid risk by waiting until there was no uncertainty left.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Tim Lutts, editor of Cabot Stock of the Month, looks at declining union membership in this Labor Day edition. He also reads the tea leaves on stock market momentum and gives the latest in his string of Revolutionary Stocks. Stock discussed: SunPower (SPWR).
Thomas Garrity, the master researcher behind Cabot Small-Cap Confidential, uses this issue to fill you in on the basics of his approach to finding small stocks with enormous potential, including technological advantages and big potential markets.
Editor Chloe Lutts Jensen of Dick David Dividend Digest writes in this issue about the varying degrees of bearishness among Digest contributors and what the pros think the month will bring. Stock discussed: Cabot Oil & Gas (COG).
Have a great weekend,
Editor of Cabot Wealth Advisory
and Cabot China & Emerging Markets Report