Raise Your Standards! Check All the Boxes
A Growth Stock in the Oil Patch
About three years ago, my wife and I started looking for a new car, specifically an SUV that could fit us and our soon-to-arrive-bundle-of-joy, along with all the pack ‘n plays, diaper bags, toys and the like that we’d have to take with us anytime we ventured out. Now, neither one of us had ever owned anything bigger than a sedan, so we had to do some digging online, followed by plenty of test-driving.
Over time, of course, we came up with an informal checklist of what we wanted (and didn’t want). The first thing, of course, was price—there was a limit on what we wanted to pay. Then came some safety features; all wheel or four-wheel drive, solid safety ratings, good handling in bad weather and the like. Then there were the goodies—plug-ins for iPhones and iPods, preferably leather (and heated) seats, sunroof, etc. And finally there were the intangibles, such as it how it handled when you actually took a turn, accelerated on the highway, and so on.
Now, whether we knew it or not, we ended up eliminating a slew of potential cars based on these criteria. Some were too expensive, some too big (and thus didn’t handle as well), others too small and some simply didn’t have the brand or looks that made us feel good about cutting a check for that much money.
As it turned out, we settled on a Honda CR-V, which, well, is what it is—nothing that blows your socks off, but reliable, drives well, is good in the snow and has enough room for us and our ever-growing (and vocal and picky and sassy and ... ) daughter. We’re happy with the purchase and it hasn’t failed us at all. And I think a big reason for that is the mental checklist written above—if we had blown an extra 10 grand, or gotten something without heated seats, or something that was too small, we would have regretted.
We all have these checklists (either mental or on paper) for a variety of purchases—whether it’s buying something big like a house or car, or food for the week or a party, or renting a vacation house. And the reason we use these checklists is simple: They work! Otherwise, you end up buying too much beer for a bourbon-drinking crowd, or rent a house that’s too far from the golf courses, or, of course, paying more than you can afford for something.
Yet, when it comes to stocks, few people develop any type of checklist, and if they do, the only criteria is that it “sounds good” ... which, of course, isn’t a criteria at all. And in my opinion, that’s a main reason so many people struggle at making (and keeping!) gains in the stock market.
Said another way, the reason most investors get nothing-to-write-home-about returns is because, for the most part, they invest in nothing-to-write-home-about stocks.
What’s a bit backwards about a checklist when it comes to the market is that it’s not so much about narrowing down which one or two stocks are going to be your best performers. Instead, it’s really about eliminating what history tells you are likely to be do-nothing stocks in most cases, thus improving your odds of finding a big winner.
It’s really no different from the high school kid who works his tail off to improve his C-minus in math, as opposed to focusing on hiking his already-solid B-plus in history.
Thus, with that in mind, I encourage you to develop some sort of checklist to use before you decide to buy something. It doesn’t have to be overly strict ... but strict enough to keep you out of trouble. If you fancy yourself a growth stock investor, I have a few simple boxes to check.
First is the price of the stock—I always stay above 10 per share and seldom delve into stuff below 12.
Second is liquidity, or trading volume—it’s usually best to stay with well-traded names. My cutoff is usually around $50 million of dollar volume per day (current stock price, multiplied by average trading volume), though you can go down to $35 million or so. But risk rises when you venture into the $10 to $20 million range.
Third, make sure the stock is in an uptrend—demand that shares are above their 200-day moving average at the very least; I prefer to see them above their 50-day lines, too.
Fourth, try to check out the firm’s earnings estimates for the next couple of quarters, as well as the next fiscal year. If you’re a growth stock investor, you should want growth; I like to see at least a 15% expected gain in the bottom line during the upcoming year.
Now, these four criteria are nothing special or proprietary, but if you follow them, you’ll be buying generally institutional-quality stocks that are in general uptrends, and that are likely to grow at solid rates in the quarters ahead. Compare this to most investors, who never look at a chart or the fundamentals, and simply chase whatever’s working or buy whatever some guy or gal on CNBC tells them to. The perfect example is none other than Apple (AAPL), which has had sour earnings estimates (zero projected growth this year) and whose stock has been in a downtrend for months.
My point is that, just following these four very simple steps could eliminate many of those feel-good stocks that end up doing nothing but costing you money. And that means you’ll make more money!
Of course, the best checklist will be much more detailed, and will come from a study of your biggest winners and mistakes over a year or two—if you find out you often buy stocks that are too extended, you can add that to your checklist (make sure the stock’s within 10% or 15% of the 50-day line, etc.). Or maybe you’ll find that you simply don’t handle a certain sector well (say, gold stocks or financials); thus, if you want exposure there, maybe you’ll force yourself to buy a sector ETF instead of picking an individual stock.
Whatever the exact criteria, it pays over time to make sure you have all your boxes checked.
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Now, with all that said, one thing I like most about having a simple stock picking checklist is that it can actually open your eyes to new opportunities. How so? Because many of us have biases, especially growth investors—technology, specialty retail and semiconductors are “good” areas, but industrial and commodities are supposedly “bad.”
However, if your checklist is refined enough, it can actually generate new ideas for you. That way, you might uncover a stock in a sector you normally don’t invest in, assuming it has all the growth and technical characteristics you look for.
One idea that popped up on my screens was an oil service stock that hadn’t gone anywhere for nearly two years, and recently reported so-so earnings and cut guidance for 2013. Not exactly a classic growth stock set-up! But the stock moved out to new highs, and after doing some digging I’ve concluded it has a long runway of growth.
It’s Cameron (CAM), and this is what I wrote about it two weeks ago in Cabot Top Ten Trader:
“Cameron is a good-sized player in the oil and gas equipment sector, with a specialty in sub-sea products that help drillers handle the flow of liquids. Business has been solid for some time, but the reason the stock is one of the strongest in the market is because of booming orders for its equipment ... especially for deepwater drilling-related equipment. Specifically, in the fourth quarter, sales and earnings beat expectations, although 2013 guidance was a bit light. But what investors focused on was the incredible bookings that Cameron recorded in the quarter; the firm landed a whopping $3.4 billion of new orders (including $2.5 billion of deepwater-related bookings), up from $1.9 billion of orders a year ago, which drove the company’s total backlog to a record $8.6 billion.
“When you combine those terrific order and backlog figures with the solid string of sales and earnings growth, still-elevated oil prices and what seems like ever-increasing demand for more deepwater equipment, it backs up the view that Cameron’s bottom line should grow 25% to 30% both this year and next. Throw in a reasonable valuation (16 times this year’s estimates) and a fresh breakout from a 23-month base (see below), and we think the stock has solid upside potential.”
As I mentioned, analysts see this year’s bottom line growing 24%, with earnings up another 30% next year, and with oil prices remaining elevated, I think those figures could prove conservative. The stock ramped to new highs on the report, and has since leveled out in the mid-60s. Ideally, it will dip a couple of points for a better entry, but barring a huge downturn in the market, I think CAM is a decent buy around here with a stop near 58.
In addition to Cameron, a ton of stocks are performing well now, telling me there are lots of opportunities for profit. And that’s where Cabot Top Ten Trader shines!
All the best,
Editor of Cabot Top Ten Trader
and Cabot Market Letter