Boston Marathon Bombing Changes Everything
Boston Marathon Bombing Changes Nothing
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One Revolutionary Stock
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For the past 26 years, I’ve taken an early lunch on Marathon Monday, to watch the winners of the Boston Marathon cross the finish line on TV. Sometimes I’ve enjoyed following the progress of friends and relatives in the race, but most years I’ve just watched the leaders (including the amazing wheelchair racers), as they completed the final painful miles and raced to the finish on Boylston Street.
The race has long been a celebration of individual effort in the creation of a larger spectacle. Bringing the racing community and the neighborhood communities together for a day, it benefited countless charities, and it hurt no one. Any pain was self-inflicted in the pursuit of a higher goal.
Now everything has changed, and for no good reason.
Now every year at this time, we’ll be reminded of the bombs that killed a handful of innocent people, injured dozens more, and prevented thousands of runners from reaching the finish line at all.
Now that the ugly world has intruded on one of the world’s most famous races, one more pure pleasure is gone. And that’s just sad.
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As to the stock market, the Boston Marathon bombing changes nothing. Trading goes on. And it’s worth noting that on Monday, long before the bombs exploded, the Dow was already down about 200 points.
Ostensibly, the catalyst for that selloff was the news that China’s economic growth had slowed from 8% to 7.7%. (Man, I’d love to see the U.S. economy grow at 7.7%).
But the reality is that the market had been showing signs of weakness for quite some time. While quality blue chip stocks were leading the way, traditional growth stocks were lagging and breadth was narrowing—classic signs of an aging bull market.
In short, the market was due for a substantial correction, and now it looks like it’s begun.
And that’s a good thing in a way, because the correction will keep the average investor confused, uncertain, and just plain less bullish.
Excess bullishness, as we all remember, is what makes big market tops, while excess caution is what makes market bottoms. Today we’re somewhere in the middle, which means there are still opportunities, for those investors who look for them.
Now, some people, faced with market uncertainties (not to mention global uncertainties), like to retreat to solid things; real estate, in fact, is having a nice comeback, though it’s still far from the levels of 2007.
And some people, traditionally, have liked gold. But one look at the action of gold yesterday should give them pause; gold charts look terrible!
Interestingly, it was only five days ago that Mike Cintolo, editor of Cabot Market Letter, wrote negatively right here about gold’s long-term prospects. With apologies for repeating ourselves, I thought it appropriate to print these excerpts.
“I think the action of gold over the past two years is a sign that this commodity’s bull market may be over … gold has been a dazzling performer since bottoming out in 2001… the September 11 attacks opened the floodgates of higher Federal spending and lower interest rates … Gold was around $250 per ounce back then, when it started to get going … all commodities acted well, with oil, gas, copper and corn all skyrocketing. Now, however, I wonder if that trend is coming to an end. While gold prices haven’t collapsed by any means, they did top out back in 2011 at $1,895 per ounce and are currently fetching about $1,575 per ounce … gold is hovering at 18-month lows while most of the headlines are still horrible! Since gold hit its peak, the U.S. nearly hit its debt ceiling, the eurozone has entered a mini-depression with numerous financial problems and, as mentioned above, the world’s central banks are all busy flooding the system with money. You’d think this would be a good time to own precious metals ... but instead, gold (and especially gold stocks) has been steadily trending lower for months … long-term, my thought is this: If the price of gold can’t get going under these circumstances, what happens if the Fed eases up on its bond buying program? Or if the eurozone gets its act together? Or if the U.S. strikes a grand bargain that puts us on a more sustainable fiscal path? Any one of those could serve as a bearish catalyst that breaks gold to multi-year lows and effectively ends its secular bull market.”
I think Mike hit the nail on the head.
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So, I’m anti-gold; I’m pro-real estate, especially the place you live; and I’m pro-stocks, provided they’re bought, owned and sold using a proven investment system, like the ones we follow at Cabot.
One of the systems I like best is our basic growth system (refined over the past 42 years), which requires a stock to have a great fundamental story, with the prospect of major sales and earnings growth, combined with adequate liquidity and a strong chart, indicating growing institutional interest.
In addition, I personally like to see a revolutionary story that has the potential of enormous growth (on the scale of eBay, Amazon and Apple).
Finally, I like to see some skepticism, because that tells me the stock is not too high yet. Remember, Apple peaked when everyone loved it.
And that brings me to Tesla, which I believe is well on the way to revolutionizing the automobile business in numerous ways. Most people who are aware of the company and its cars know about some of these revolutionary features, but few people are aware of all of them, so here’s my list.
One, its cars use no gasoline. They’re all-electric, recharged primarily by plugging in (just like you plug in your phone overnight) and secondarily by regenerative braking.
Two, its cars are made in California, which is most unusual.
Three, the company is guided by a business plan generally used for technology companies, which involves launching high-priced, high-margin products first and then using those profits to develop lower-margin mass-market products.
Four, the company uses non-union labor.
Five, its cars are not sold by dealers; they’re sold directly by the company, either in showrooms (like Apple) or remotely.
Six, its prices are clear and fixed. There’s no haggling with a salesman.
Seven, Tesla carries no inventory. It has a backlog of orders, so each car is manufactured to the specifications of each individual customer.
Eight, lucky customers who are in range of Tesla’s growing network of public superchargers can recharge their cars for free!
Finally, the cars are fun to drive, thanks to great acceleration and a very low center of gravity.
Put that all together and what do you get?
In the long-term, nobody knows! But that’s okay. In fact, that’s one of the attractions!
The Unforeseeable and the Incalculable
You see, back in 1972 a fellow named Thomas W. Phelps wrote a book about the ultimate buy-and-hold investing strategy, called “100 to 1 in the Stock Market,” The main idea was that you should buy companies with excellent prospects for growth, companies that had the potential to change the world in a big way, and to grow earnings immensely in the process. And you should hold those stocks forever.
The results of this method, detailed in Mr. Phelps’ studies, were superb. And the phrase that sums up his method more than any other is this.
“Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable.”
Well, I think Tesla (the company) has the potential to change the world, not just by getting us to drive electric cars, but by getting us to give up the practice of stopping to buy gas, and the practice of haggling with car dealers, both of which we accept as necessary evils. I think this car company’s potential is unlimited.
And I think TSLA, as a result, is one of those stocks that has the potential to be a huge winner, if you just give it time, so that you can profit from the unforeseeable and the incalculable.
I first recommended TSLA in Cabot Stock of the Month on Dec 28, 2011. Subscribers who followed my advice bought at 29.
Four weeks ago, I featured TSLA here as the last of my “10 stocks to hold forever” feature. At the time, the stock had pulled back from 39 to 35 and I wrote, “From a long-term perspective, this looks like a decent entry point.”
Soon after, CEO Elon Musk announced that Tesla was on target to turn a profit in the first quarter of this year, and to deliver 20,000 cars this year, and the stock rocketed out to new highs on huge volume.
Now, Wall Street analysts may lack imagination, and I know they don’t subscribe to “the unforeseeable and the incalculable,” but when they plug Tesla’s earnings numbers into spreadsheets, they don’t need much imagination to see that those earnings will grow if the company continues to execute on its plans to grow revenues by expanding production and developing lower-priced cars. So institutions are definitely getting on board this stock.
But volatility remains an issue here. Traders like this, because they profit on the long or short side, and there’s no doubt the stocks’ recent surge has encouraged some short-sellers to try to profit from the next pullback. Maybe they will.
But TSLA’s long-term trend is clearly up. Today, it closed at an all-time high, marching to its own drummer. I recommend that you get on board on the next normal pullback.
Better yet, I recommend that you take a trial subscription to Cabot Stock of the Week Report so you stay updated on all my TSLA advice, and learn about other great stocks as well.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Editor of Cabot Stock of the Week
