In Cabot Growth Investor, I’m trying to understand how you decide how much to buy of a particular stock in your Model Portfolio. Do you overweight some ideas? Underweight? And how many shares should I buy?
Mike Cintolo: There’s a short answer and a long answer to your question. First, the short version: When fully invested, we have 10 stocks in our Model Portfolio (we run a concentrated ship, as do most growth investors), so any new purchase is going to be about 10% of the portfolio. Thus, if you have a $100,000 account, you’d buy $10,000 worth of stock, however many shares that turns out to be.
That’s the general method. In practice, it’s a touch more complicated. We have 10 “slots” in the Model Portfolio, so when we add a new stock, the amount of money we dedicate to it is: Total Cash divided by the number of empty slots.
Example: We have six stocks in the Model Portfolio, and thus four empty slots. We also have a cash position of $50,000. Then we decided to buy one new stock. Thus, we’ll take $50,000 divided by four = $12,500, which is what we’ll buy the new purchase. Note that we don’t care about buying round lots of shares—we care about the dollars invested.
In practice, though, it’s easier and nearly the same to simply invest about 10% of your account in each new recommendation.
Question: I’m a new subscriber to Cabot Top Ten Trader and I’m wondering if you have any ideas on how best to use the service—there are many recommendations and I can’t buy all of them, so how should I go about selecting those stocks to target?
Mike Cintolo: At its heart, Cabot Top Ten Trader is a source of new ideas for the investor that wants the first four or five steps of the process done for him (find the strongest stocks, analyze why they’re strong, suggest prudent buy ranges and loss limits, offer follow-up advice, etc.) but can then take it from there.
That said, we do have a few pointers when starting out. First, of course, begin with the Top Pick, which is the stock we think has the best combination of fundamentals and technicals.
Beyond that, you should keep your eyes open for new themes or sectors that emerge. The obvious example recently has been the boom in “old world” stocks, which began popping up on our screens in mid-November. Such group moves often provide great entry points, especially when the group hasn’t been doing much in recent months. We always try to point out any bullish group action when we see it.
I just joined Stock of the Week and have a question. When you recommend a stock and the price jumps 10 percent the next day do you recommend waiting for a pullback to jump in? Your report suggested jumping in if there was a favorable reaction today to the earnings report but with the stock now up 10%, I’m wondering if you’d advise waiting on a pullback.
Tim Lutts: Thanks for asking. In general, when investing in true growth stocks, strength is good; momentum is your friend. So I would treat the current mid-day retreat from the high of 50.30 as a buying opportunity. But don’t over commit. Start with a pilot position, and average up if the stock does what we want.
I am a subscriber to your Cabot Explorer newsletter. What trading platform do you recommend for me so I may purchase some of the securities.
Carl Delfeld: All of the stocks recommended in Cabot Explorer trade on U.S. exchanges and can be bought using an online broker such as TD Ameritrade, E*Trade Financial, Schwab, Fidelity or any other. A little shopping around will find the service with the best combination of trading fees, research resources and news that feels best for you.