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Growth vs Value Investing

Different investment styles have different objectives and require different rules. Value investing looks for undervalued stocks.

Stock Market Video

Growth vs value investing

Make Up Your Mind, Cabot!

It’s the early Worm that’s gotten

In Case You Missed It


In this week’s Stock Market Video, Mike Cintolo discusses his “lean bullish” stance; he sees more good than bad in this market, but does point out a few lingering worries, even as the market pushed ahead this week. All told, earnings season, which is now underway, is likely to tell an important tale for the market and most leading stocks. Stocks discussed include: LinkedIn (LNKD), Cree (CREE), Cabot Oil & Gas (COG), Equinix (EQIX), Boeing (BA) and the SPDR Financials Fund (XLF).

Make Up Your Mind, Cabot!

I want to address a very simple question today: how is it that one Cabot publication can have a recommendation to sell a stock while another one says to buy it? This is a question that we get asked fairly frequently as our eagle-eyed subscribers point out our inconsistency, sometimes with a little edge to their communications. (I’ll give you a hint, it has to do with growth vs value investing.)

For instance, the most recent issue of Cabot Benjamin Graham Value Investor lists Biogen Idec (BIIB) as a sell, and the numbers tell the story. Here’s a screen shot of the line that summarizes the recommendation:

BIIB Table

What it says is that BIIB was trading at 192.77 on April 1 and that its maximum buy price was 93.48, so it’s just too expensive to buy. The minimum sell price was 126.38, the point at which the stock was fairly valued. The rest of the information is technical—EPS growth, dividend yield (BIIB doesn’t pay one), quality ratings, growth ratings and the like. But the last item is “Sell.”

From a value standpoint, this is a perfectly logical rating. Since value investing means finding undervalued stocks and riding them until they achieve fair value, the rules are clear.

Value investor do very well by buying low, having a high number of positions and following the rules rigorously. The high number of positions diversifies risk, lowering the possibility that a collapse in one position can materially harm your portfolio. And since the value discipline often mandates holding an issue for years until it achieves its fair price, investors aren’t constantly faced with buying and selling decisions in difficult market conditions.

And finally, because the stocks favored by value investors often pay nice dividends, there is a flow of income to look forward to. That’s one thing that has given the value style such a nice boost in recent months as investors have turned more conservative and favor more stable income stocks.

So what does a growth investor have to say about Biogen Idec?

I’ll answer that by reprinting the entire evaluation of BIIB from a recent issue of Cabot Top Ten Trader, our aggressive growth advisory that’s emailed after the market closes every Monday. Top Ten (as we call it) picks the 10 best growth stocks of the previous week, based on the stocks’ performance versus the broad market. All stocks are also screened for price (above 10), liquidity (usually averaging 500,000 shares a day) and technical factors.
Here’s the write-up. The first paragraph is called Why the Strength? The second is called Technical Analysis.

“Biogen is a major player in the global biotech business, a company with several blockbuster drugs like Avonex (for the treatment of relapsing multiple sclerosis), Rituxan (for non-Hodgkins lymphoma and rheumatoid arthritis) and Tysabri (for relapsing MS). The company’s Tecfidera (an oral treatment for MS) just received FDA approval, and news that the company was pricing it at $54,900 annually (which is lower than comparable treatments from Novartis and other competitors) gave the company a big boost in analysts’ ratings. Biogen has a number of successful drugs that target major diseases that affect large populations. Sales are global, with a little over half coming in the U.S., a hair less than 40% from Europe and the rest around the world. Biogen also has a strong pipeline of candidate drugs in late-stage clinical trials, including one for leukemia and one for hemophilia. The company plows nearly a quarter of its free cash flow back into R&D, and shows no signs of resting on its strong base of approved drugs. The company has a war chest of about $3.7 billion in cash, cash equivalents and securities that are expected to be used in promoting strategic alliances and share buybacks. Biogen’s ongoing stock repurchase program bought $2.1 billion of shares in 2010 and $1.5 billion in 2011. A restructuring in November 2010 sheared away 13% of the company headcount, which translates to about $300 million in reduced expenses. Biogen is set to run lean and to keep buying back its shares.

“BIIB has been in a steady uptrend since the middle of 2010, boosted by approvals of its major drug products. From 46 in June 2010, BIIB had soared to 177 at the beginning of last week. And the Tecfidera news kicked the stock as high as 197 today! BIIB traded under resistance at 155 from the middle of September until late January, but has been on a roll since. With its 25-day moving average back at 175, BIIB may be a little extended, but it’s not out of line with its long-term price trend. Look for a pullback toward 190 as an entry point and put a loose stop around 165, as BIIB isn’t a high-risk proposition.”

And here’s a simplified chart showing what BIIB has been doing over the past three months.

BIIB Stock Chart

As you can see, the chart reflects a very nice rally from about 142 to around 200. And the description of the company sounds very optimistic. In short, this is exactly the kind of stock that growth investors really like to get their hands on. And Cabot Top Ten Trader says it’s a good buy on a pullback toward 190.

How can both ratings—the sell recommendation from Cabot Benjamin Graham Value Investor and the buy recommendation from Cabot Top Ten Trader —be right?

The answer is that different investment styles have different objectives and require different rules, growth vs value investing.
Value investing looks for undervalued issues and holds them until they are no longer undervalued. By holding lots of stocks and following the rules, value investing achieves gains with relatively low risk. And BIIB no longer represents a good value.

Growth investors are looking for price appreciation, and they’re willing to take on additional risk to get it. They jump into strong stocks, often after they have already begun to soar, and use sell disciplines to get out as soon after a stock peaks as possible. And they use cues about the direction of the market to adjust their level of aggressiveness, becoming heavily invested when market trends are up and dialing back their exposure when markets are down.

The reality of the market is that every investment portfolio ought to have some of both value and growth in it. Value is a great foundation for a diversified portfolio. But if you stick strictly to value, you’re leaving lots of growth gains on the table.

So that, in a not very small nutshell, is why different Cabot newsletters can have different opinions and ratings of the same stock.

If you’d like to see what a full issue of either of these admirable (but very different) advisories looks like, I’d be happy to send you a recent issue. Just reply to this email and I’ll get it to you.

Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.

It's the Early Worm That's Gotten Button

It’s the early Worm that’s gotten

Tim’s Comment: This, of course, is the companion button to “The early bird gets the worm.” It reminds us that being too early can be dangerous, whether you’re skiing on an avalanche-prone slope just after a big snowfall or venturing into a falling stock at what you hope is a bottom.

Paul’s Comment: I love it when proverbs wrestle with one another, as this one does. When you have “Always look before you leap” on the one hand, there’s always “He who hesitates is lost” on the other. My other favorite alternative take on this subject is “The early bird gets the worm, but the second mouse gets the cheese.” Being the first arrival at a trap isn’t a good thing.


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.

Cabot Wealth Advisory 4/8/13 — Philanthropy in Philadelphia

Cabot Stock of the Month’s Tim Lutts writes about a recent trip to Philadelphia that featured visits to two great collections built by wealthy eccentrics, Albert C. Barnes (art) and Edwin A. Fleisher (music and orchestral scores). Stock discussed: BioMarin Pharmaceuticals (BMRN).

Cabot Wealth Advisory 4/9/13 — Low-Risk Stocks with Healthy Dividends

Cabot Benjamin Graham Value’s Roy Ward discusses why it is that his record is slightly better than Warren Buffett’s, and why buying blue chips that pay dividends is a low-risk road to consistent returns. Stocks discussed: C.H. Robinson (CHRW) and FactSet Research Systems (FDS).

Cabot Wealth Advisory 4/11/13 — Two New Major Market Trends

Mike Cintolo of Cabot Top Ten Trader talks in this issue about two big trends, the resurgence of interest in Japanese stocks and the waning of interest in gold. Fundss discussed: MAXIS Nikkei Fund (NKY), Japan iShares (EWJ), WisdomTree Japan Hedged Equity Fund (DJX), Market Vectors Gold Miners Fund (GDX), SPDR Gold Trust (GLD) and ProShares UltraShort Gold Fund (GLL).

Have a great weekend,

Paul Goodwin

Editor of Cabot Wealth Advisory

and Cabot China & Emerging Markets Report


Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.