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Six Things the Olympics Taught Me

Editor of Cabot Stock of the Month reviews the lessons that the Olympic games taught him and discusses a young high-potential stock.

Six Things the Olympics Taught Me

Stocks vs. Bonds

A Young High-Potential Stock

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All over the world, commentators are doing their post-Olympics commentary/criticism, so here’s mine, featuring six things the Olympics taught me.

1. Time Is Money. Usain Bolt—the world’s fastest man—earned roughly $20 million in endorsements over the past year, including about $9 million a year from Puma. Second place finisher Yohan Blake, though just 12 thousandths of a second slower last week, earns far, far less.

Note: This conclusion is corroborated by an old T-shirt I own, designed by Far Side cartoonist Gary Larson, featuring a picture of Albert Einstein in his laboratory. The caption reads, “Einstein Discovers That Time is Actually Money.”

2. China Remains Ascendant. With a massive population to draw from, a great variety of physical ethnic types, government power to direct investment where it’s most likely to pay off, and a national tradition of glorifying hard work, China is destined to grow its medal count in the years ahead. In the U.S., we’ve grown accustomed to seeing daily medal tallies that show the U.S. and China on top (replacing old rival Soviet Union), but I saw an amusing graphic created by a European, that showed the European Union topping the charts when the member countries are counted as a single entity.

3. Unexpected Events Occur Frequently. Sure, the folks at NBC had their scripts, backed by taped interviews with the athletes most likely to medal. But often enough, chance stepped in. For every scripted fairytale featuring Michael Phelps or those beach volleyball girls, there’s a corresponding surprise. British diving sensation and heartthrob Tom Daley failed to medal (in early events). The Spanish Soccer team choked early. The Chinese badminton team was penalized for not trying to win. British diver Stephan Fleck landed flat on his back, making a big splash and scoring a zero. A boxer brought home the first Olympics medal ever for Mauritius, while a sailor from Cyprus did the same for his country.

4. The Race Doesn’t Always Go To The Fastest. Consider the men’s cycling road race, in which British sprinter Mark Cavendish, who has won 23 stages of the Tour de France over the years—including three this year—finished 29th. It wasn’t his fault. The explanation revolves around the fact that road cycling is typically a team sport, that British cyclist Bradley Wiggins had just won the Tour de France, and that Cavendish was favored to win the Olympic race. As a result, riders from other countries were reluctant to take their normal stints riding at the front of the peleton, leaving the British team to do more of the work and the peleton thus a bit slower than it could have been. Add to that the fact that a large breakaway group of 30-plus riders (none of them top contenders) had escaped earlier, and the large size of this group made it effective at keeping ahead of the peleton. And it was out of this group that the eventual winner emerged, 38 year-old Alexander Vinokourov of Kazakhstan.

5. The Internet is a wonderful thing. Thanks to NBC’s Live Extra—and Comcast cable service—I wasn’t handcuffed to the programs NBC chose to show Americans. Instead, I was able to watch events I cared about, like sailing, kayaking, rowing and the various cycling events, road, track, BMX and mountain. (I once broke a shoulder in an amateur road race; the next year I came back and won.)

6. I’m starting to get old and cranky. Not only am I increasingly unable to tolerate extensive viewing of the subjectively judged sports like gymnastics, diving, synchronized swimming and rhythmic gymnastics, I’m now envisioning adding more sports in which pure measurement is all that counts. I think bringing back the rope climb would be fun. And I’d like to see tug-of-war reinstated, but in my vision, it’s a special event on the last day of the games, and there are no tug-of-war specialists. Instead 10 participants per country are chosen by lottery on the first day of the Olympics, and no substitutions are allowed. If an athlete is unable to participate, fewer than 10 pull, and good luck to them.

Finally, my hero from the games was 65-year-old Peter Deary, who drove the motorized bicycle (derny) that paced the Keirin track cycling races, in an outfit that reminded me of a French beatnik turned pizza delivery man.

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Moving on to investing, I want to repeat a comment that Mike Cintolo made last week. He noted that the weak hands now own bonds.

“Weak hands,” in market parlance, are those investors with the least conviction, and thus the most likely to flee when conditions turn against them.

They’ve flocked to bonds in recent years because bonds are perceived as safe. They don’t mind that their yields are minuscule; they feel protected from the risks of the stock market.

But eventually, when stocks are acting better and their fear dissipates, these weak hands will shift their money back into stocks, thus helping fuel the next major bull market.

But when?

Well, the July 19 issue of “The Chartist,” published by Dan Sullivan, provides a clue, and you can read the relevant section below, in its entirety.

But first a note about Dan. I’ve never met him; he’s in California and we’re in Massachusetts. But he’s been publishing his investment advice since 1969, one year before my father started The Cabot Market Letter, and Dan is still at it.

He wrote:

STOCKS VS. BONDS

“Over 83 years (1928-2011) stocks have returned 9.23% annually versus a return for U.S. Treasury bonds of 5.41% annually. Stocks have almost outperformed bonds by a 2 to 1 margin. Since 1928, $100 invested in stocks grew to $166,787.51 and for bonds $100 grew to $6,726.52

“Over the ten year period (1990-2000) stocks returned 17.3% per year with bonds returning 8.4% per year.

“Since the peak of the stock market in 1999 (1999 to 2011) stocks have returned just 0.53% per year versus a return for bonds of 7.23% annually.

“In the past 9 years (2002-2011) bonds have outperformed stocks by over a 2 to 1 margin.

“From (2007-2011) bonds have gained 7.66% per year with stocks losing 1.63% annually.

“Thirty years ago U.S. Treasury Bonds had a peak yield of 13.65%, and since then as rates have declined to historically low levels, bonds have returned 9.16% per year which consists of interest earned and appreciation (when yields drop bond prices rise). Given today’s already historically low yield of 1.48%, an investor will not be able to count on much appreciation going forward, to add to the 1.48% yield.

“Stocks have significantly underperformed their historical average over the past 12 years (1999-2011) and an investor should expect that to change over the next 10 year period.“

Long-term investors, therefore, should be looking seriously at stocks.

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So where do you look to find growth today?

IPOs are often a good place to look, particularly if they’re not too popular. Facebook (FB), for example, was hugely popular when it came public, and thus overpriced. Facebook stock is down 50% since then. But take a look at Five Below (FIVE), which came public just a month ago, to little fanfare, and you may find something you like.

Mike Cintolo certainly did, as he mentioned it in last week’s Cabot Market Letter, writing this:

Five Below (FIVE) is a retailer that targets teens and pre-teens with items priced at $5 or below.

The stores are generally smaller (7,500 square feet) and are profitable very quickly (payback within one year). And Five Below is expanding like mad! It had 200 stores at the end of April, and plans to open 50 more this year and 60 in 2013. Sales, earnings and profit margins are all heading in the right direction, and the stock is crawling higher.”

To elaborate, the IPO priced at 17. On the first day of trading (July 19), it traded between 24 and 29, and it’s closed higher every week since, hitting 34 last Friday before pulling back a bit—with the market—today.

The stock is so young that there are no consensus earnings estimates from analysts, so there’s little question that there’s great potential for perceptions to improve as analysts become aware of the company. Top management previously founded and ran Zany Brainy, and

I think the Five Below concept has greater potential because it aims at a larger demographic (the unbrainy) and because the overt focus on low prices—like the very successful dollar chains—broadcasts the bargain proposition clearly.

So, you could just buy the stock today—or later this week—hoping the current pullback is a brief pause in a major uptrend.

But the trend in FIVE is still rather young, and trading volume is a little light, so a better choice would be to take a no-risk trial subscription to Cabot Market Letter, so you can keep up to date on Mike Cintolo’s very best ideas from week to week.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Editor of Cabot Stock of the Month

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.