It’s February in New England. (Well, it’s February everywhere, but the month means something entirely different to someone in New England than to someone in, say, Florida.) We’ve had plenty of snow and plenty of reasons for non-skiers like me to sit on our sofas in our sweatshirts and watch television.
It’s also the month when many New Year’s Resolutions butt heads with the reality principle and people who spent lots of time in the gym in January are now self-medicating their winter blues with pints of Haagen Dazs.
It’s also winter for investors, as major indexes continue to either work their way lower or are sitting at what might be the start of a bottom building process.
While there isn’t any substitute for the diet and exercise you promised yourself you’d do six weeks ago, there’s a stock diet that will allow you to make huge progress in your equity portfolio. I call it my SNaC Diet, and it’s the best way to get your portfolio in shape, even if you can’t seem to make progress in the campaign against your love handles.
SNaC: Story, Numbers and Chart
SNaC stands for Story, Numbers and Chart, and it’s the method I use to pick stocks for the Cabot China & Emerging Markets Report. There’s nothing complicated about it, but it can be very powerful. Just because it’s simple, that doesn’t mean it’s easy to do, any more than the simplicity of “exercise more and eat less” makes that particular prescription easy. Here are the basic principles.
Story
Story includes the basic market proposition of a company, including its products, its target consumers, its potential for huge sales growth, its barriers to entry, its competition, its intellectual property, its management and all the other stuff that you can put into words. When someone buttonholes you at a party and tells you about a penny stock they’ve found that just can’t miss ... what you will probably hear is the power of a stock’s story at work.
Story is an attractive way to look at stocks because we’re all trained to react to stories. We like books and movies about people who have great ideas and struggle (against apathy, short-sightedness and malevolence) to gain acceptance (and make a pot-load of money). And we’re attracted to the same things in stocks.
Numbers
But there are lots of stocks with great stories that don’t do a thing. I also want good numbers, which are a record of a company’s success. I look for stocks that have been growing revenues and earnings for a number of quarters, ideally with earnings (profits) rising faster than revenues (sales). I like to see the rate of growth for both categories rising. It’s also nice to have an increasing number of institutional investors and an after-tax profit margin that’s high and rising. And finally, I want a stock that’s liquid - trading at 400,000 shares a day or more - so Cabot subscribers can trade without being worried that the stock will get deep-sixed by one money manager who wants out.
Numbers can be comforting because they give you a sense that more and more consumers and businesses are buying a company’s products, and that management knows how to grow profits.
Charts
Charts are where the rubber meets the road in growth stock investing. Some highly technical investors don’t even care what a company’s product is or how much money it’s been making. They think they can tell everything they need just from a stock’s chart. I’m not that confident, but I know that a stock with a rising price and good volume support must be doing something right. When I screen my emerging markets investment universe for candidates to recommend, I’m really looking for stocks whose price is rising. And that’s what’s on a chart.
Charts also tell you about a stock’s momentum - whether its rate of appreciation is rising or falling, whether it’s shaping itself into any of the classic patterns of consolidation, reversal or base-building. I’ve sold stocks that were going up steeply because the chart told me it was a climax top. And I’ve bought stocks that had advanced sharply and then corrected into a tight pattern that indicated steady accumulation.
Of the three components of the SNaC strategy, I guess I like the charts the best. But I can see the value in all three, and I think that all three parts - Story, Numbers and Chart - can help to shift the odds in favor of a stock’s success. The best stocks have great stories, strong numbers and technically attractive charts. In an enterprise that requires you to use every advantage at your disposal to get the odds on your side, it just makes sense to go for the complete package.
Even if you can’t lose the pounds you wanted to, you may be able to use the balanced investing diet of Story, Numbers and Chart to SNaC your way to enough money to buy lots of Haagen Dazs.
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One quick thought about market bottoms. (This may not make much sense to those of you who’ve never lived anywhere that gets a lot of snow, but bear with me.)
Stock markets go down because people don’t feel like owning stocks. They’re worried that subprime debt will wreck the credit business and that there’s going to be a recession. They fret that declining house prices will dampen consumer spending, which will lead to an earnings implosion in retail. Whatever the rationalization behind it, they’re afraid they’re going to lose money, and owning stock makes them so nervous that they can’t sleep at night.
Fair enough.
So people (and institutions) sell stocks and markets go down. And they pick up momentum on the way down as people see that prices are falling and jump on the selling bandwagon.
They keep on going until the last diehard, the last hold-out, the most stubborn growth investor in the world finally gives up and sells out. That’s the bottom.
Now, obviously, people still own stock, because every time someone sold, someone else had to buy. But at the bottom, people are either content to hold stocks because they got them so cheap or they’re so discouraged that they don’t even have the energy to sell. It’s the long, dark night of the investor’s soul, the moment of greatest despair.
It’s also the point at which stocks start to go up. That’s what a bottom is.
Nobody knows when a bottom is reached; that’s something you can only see in the rear-view mirror. But there can be lots of clues that a bottom-building process is taking place.
Market Bottoms and Spring
I like to think about market bottoms like I think about the coming of spring in New England. Spring doesn’t wait for the snow in my front yard to melt and then arrive. Weeks before we get the robins in the back yard and the sap rising in the sugar maples and the potholes appearing in the roads (spring isn’t an unmixed blessing up here), the snowdrops, little white flowers that will about three inches high, are already pushing their leaves up through the thinning edges of the snowpile. That’s spring on the way, even if the snowplow doesn’t know it.
In the stock market, I think we’re beginning to see a few snowdrops. Some metals stocks and some energy issues are showing a willingness to take the lead. And like the snowdrops, they may be buried a time or two by additional snowfall. But they won’t give up.
The moment of greatest discouragement with the snow, slush, grey skies and frigid winds of winter is precisely when spring begins.
That’s something you might want to keep in mind if you’re thinking about subscribing to the Cabot China & Emerging Markets Report (or one of our other newsletters) but want to wait until the market turns up. Somewhere under the snow, some small parts of the BRIC world (Brazil, Russia, India and China, our preferred emerging markets) are already turning up. And if you’re among the people who get Cabot’s message when our market timing indicators turn positive, you’ll be that much ahead of the people who still only see the snow.
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My investment idea in this issue of Cabot Wealth Advisory is a wait-and-see proposition. It’s a company that I had great success with in the Cabot China & Emerging Markets Report during part of the stock’s rise from 6 in 2004 to a high of 63 in late 2007.
I want to talk about it, not because it’s ready for you to invest in, but because it has a great story and excellent numbers ... but the chart just isn’t there right now.
The company is a Chinese travel agency called C-Trip (CTRP), the leading travel agent in China. The company is really an aggregator, a business that began by bundling up blocks of hotel accommodations and airline seats and offering them to the public at a discount. From that humble beginning, the company has become the leading online travel agency in China, with earnings that increased 73% in Q3 2007 with an after-tax profit margin that hit an eye-popping 41.1%. The stock is liquid (trading 823,000 shares a day) and estimates for full year 2007 earnings are up 34%. (Quarterly earnings are due on February 27, so we’ll find out then.)
With the Chinese people becoming increasingly prosperous and mobile, the story on C-Trip is excellent. And its numbers are clearly superior.
The only problem is the chart. CTRP ran into a double top at 63 last November and December, and then dipped as low as 40 (very briefly) in January. Since then it’s been trading mostly in a range between 45 and 50. But it’s tightening up around 48 and may be building a new base there.
So, like the snowdrops in my front yard, it may be telling us that it’s ready for spring to arrive. But charts, which can tell you a lot, can’t tell you when something will happen. If CTRP is going to get a boost from the upcoming Olympics and put in another rally, we’ll be all over it. But it may never happen, too.
So I’ll keep watching, looking for the breakout on good volume that will signal investors’ renewed appetite for CTRP.
Paul Goodwin
For Cabot Wealth Advisory
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Editors Note: Paul Goodwin is the editor of Cabot China & Emerging Markets Report. Hulbert Financial Digest recently listed Cabot China & Emerging Markets the Top Investment Newsletters of 2007 with 74.1% return for the year. Peter Brimelow of MarketWatch several days later did the same... naming Cabot China & Emerging Markets Report his 2007 Investment Letter of the Year.
Emerging markets have outperformed the markets of the developed world over the past few years, and China is the clear leader in economic growth. But it’s not the only player. The Cabot China & Emerging Markets Report focuses on the BRIC countries (Brazil, Russia, India and China) and seeks out the stocks with the best stories, the soundest fundamentals and the hottest charts. If you’d like a dependable guide to investing in these intriguing markets, you should consider a no-risk subscription. Click below to get started.
