Investing in growth stocks is both easy to explain and very hard. The easy part is price appreciation. You buy a stock at 10 and it goes to 20 and you sell it. Everybody understands that doubling your money is a good thing.
Right now in our Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor) portfolio I have one stock that has appreciated 136%.
But stocks that make heroic gains are central to growth investing, because the bulk of gains in growth portfolios will come from just a few stocks each year. It’s the two or three stocks that double (or more) that make your year. The rest of your portfolio will typically end the year with small gains and small losses that mostly cancel each other out.
By eliminating big losses (“cut your losers short!”), you let the big gains do the heavy lifting for the entire portfolio.
Today, I want to give you the whole story of Weibo (WB), which is the 136% gainer I was telling you about. I’ll mostly use chunks of the writeups I did of Weibo in Cabot Global Stocks Explorer.
The Weibo story begins well before you could actually buy WB stock. This is from Cabot Global Stock Explorer’s October 2015 issue.
Back in 2013, we put Sina Corp. (SINA), one of the largest Web portals in China, on our watch list. The company had a full-service website and good growth numbers, but what really intrigued us was Sina’s microblogging service, dubbed Weibo, which is a lot like Twitter (TWTR) with a bit of Facebook thrown in. Like Twitter, Weibo postings are limited to 140 characters. But because 140 Chinese characters can communicate as much as 70 to 80 English words, it’s a much richer content conduit. And when you add in Weibo’s support for attached multimedia and long-form communications, a Weibo post can be substantial. Chinese businesses, celebrities, charities and even government agencies use Weibo to get their messages out.
I noted that Weibo, which was launched in 2009, had more than 500 million users with more than 100 million messages sent each day. Plus, 18% of Weibo was owned by Alibaba (BABA), which had just spent $4.6 billion to buy up the rest of Youku Tudou, the most popular online video site in China. The possibilities for synergies seemed huge.
Cut to April 7, 2016, and I was ready to add Weibo to the portfolio again after one previous attempt ran into a quick market reversal in January and February (cut losers short!).
Here’s how I described the company’s financials.
Weibo gets its revenue from selling ads, just like Facebook (FB). Revenue grew 43% in 2015, which is down from the 186% growth in 2012 and 77% in 2013, but is plenty big. The company now has 600 million registered users, 222 million of whom are active monthly users. And since 85% of Weibo’s traffic comes from mobile and 82% of mobile users shop online, ads, including the new video ad service that’s expected to go live this year, are not cheap. Estimates are for earnings to grow 56% in 2016 and 68% in 2017.
I recommended buying WB at 20. Here’s what the stock’s daily chart looks like now.
WB has made a huge run and I have already taken partial profits (selling one-third of the portfolio’s position), but I’m not convinced that the stock is done. Growth projections for revenue and earnings are still enormous and Chinese stocks are gaining popularity again after a period of investor skepticism.
But the big thought I want to leave you with is that growth investing is a very specific kind of game, with strict rules. It’s not the buy-and-hold enterprise that appeals to income investors who target consistent dividend returns. And it’s not the buy-undervalued-sell-fully-valued strategy of value investors.
Done right, growth investing is a disciplined search for stocks with the potential for really big price appreciation. In order to play, you need both a way to find stocks with that potential and a set of rules for kicking unsuccessful stocks out of your portfolio while letting winners run for as long as possible.
Weibo is a great company in an enormous market, and the possibilities for revenue and earnings growth are dazzling.
But I will hold the stock only as long as it continues to do its job. When its chart flattens out, I will likely put it on hold. And when it loses momentum and starts to roll over, I will sell it and move on to the next high-potential stock. That’s the way growth investing works.
If you like growth investing and would like to be part of that search for emerging market stocks that have what it takes to soar, you can get started with Cabot Global Stocks Explorer by clicking here.
“Mr. Market is kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused … you sell to him, and if gets depressed, you buy from him. There’s no moral taint attached to that.”
Tim’s comment: Both value-oriented investors (like Mr. Buffett) and growth-oriented investors can benefit from recognizing that the shorter-term movements of the market are mainly noise; in fact, the markets could function just as well if they traded only one day a week! So don’t let this noise deter you from your plan. Instead, take advantage of this noise when you can!
Paul’s comment: I know I’ve run this Fortune Cookie before, but I just love Warren Buffett’s sense of humor; he seems like the most relaxed really rich guy I know. And his strategy of selling into rallies and buying into corrections makes sense … for a value guy. But as a growth investor, I prefer to just appreciate his humor and follow my growth disciplines.