DOW 20,000

Lots of people are excited that the Dow hit 20,000 this week—but what does it really mean?

DOW 20,000Fundamentally, it means almost nothing: simply that the combined value of the 30 big companies tracked by the index have risen to a new level that ends with four zeroes.

But investing is as much about perceptions as fundamentals, and because those four zeroes look impressive to our mammalian brains, the milestone is perceived to be important.

Personally, I couldn’t care less.

When I research growth stocks, I don’t judge them by the price they’re trading at; I judge them by their trends. And that’s what I’m going to continue to do.

Today, the market’s trend is strong; in fact, the trends of smaller, growthier stocks are even stronger than the Dow. So the Nasdaq Composite is where the real action is.

NasdaqBut because the Nasdaq is not trading at a big round number (as I write it’s at 5655), the Dow gets all the attention.

That’s fine with me. And if it gets even more people interested in investing, all the better. As I write, my portfolio in Cabot Stock of the Month is holding 18 stocks, and 16 of those positions are profitable.

To join me, click here.

Twilio (TWLO)

What does Twilio do? Something dubbed “cloud communications.” It’s like cloud computing, but it involves connecting things like business telephones, cell phones and text messages and enabling people to use them more efficiently than even before.

Twilio logoWhen you use your smartphone to call an Uber, Twilio does the magic that enables the driver to contact you from his phone.

When you use Facebook’s messaging app, WhatsApp, Facebook uses Twilio to verify your identity.

Home Depot and Nordstrom are big customers.

And we use it at Cabot too, to manage deployment of our 800 numbers.

How does it work? Twilio uses Amazon Web Services to host telephony infrastructure and provide connectivity between HTTP and public switched network.

And the coolest thing is that the applications for Twilio appear to be enormous, as developers can write programs for any purpose they can think of.

But the coolest thing at the moment is that I recommended it to my readers less than seven weeks ago and today they’re looking at profits of over 35%. It’s a good start!

For more info, become one of my regular readers!

TESLA vs TOYOTA

zoes-kitchenSome investment stories are simple, and some are complicated.

On the simple side are companies like Zoe’s Kitchen (ZOES), a restaurant chain that serves healthy Mediterranean fare at reasonable prices. With 130 locations in 15 states, Zoe’s has the potential to expand substantially, using the cookie-cutter principle employed by all successful chain restaurants.

On the complex side is a company like Tesla Motors (TSLA), which sells electric cars. Not only is a car a far more complex creation than a spinach rollup—barriers to entry are high, competitors are well entrenched, and even the dealer infrastructure is a captive of the status quo.

Yet Tesla has managed to surmount all those difficulties, and done it so well that in the latest Consumer Reports customer satisfaction survey, the Tesla Model S came out on top for the second year in a row, with a rating of 98. (The Corvette Stingray earned a 95, while the Mercedes-Benz E-Class sedan earned an 88.)

tesla-redWhat the typical Tesla owner loves about his car is its drivability, its elegant styling, its low repair and maintenance costs and its low fueling costs. To most of us, that driving experience (sheer silent acceleration) is the best thing about the car, and that’s a direct result of its single-gear electric motor, which supplies instant torque with none of the noise, vibration and harshness (NVH) of an internal combustion vehicle.

Going forward, Tesla promises to come out with a $35,000 car in 2017, as it drives down the cost of batteries with its huge gigafactory near Reno, Nevada.

But the battle to replace the internal combustion engine is far from over.

In fact, Toyota, which is 100 times larger than Tesla as measured by revenues, is betting that hydrogen-fueled cars (not battery electrics) are the solution. Its Mirai, which will use fuel cell technology to convert hydrogen into electricity, will be available for sale in 2015 (in Japan and California) for about $57,000, which though not cheap, is $14,000 less than the least expensive Tesla.

But Toyota will only make 700 vehicles that first year, and the biggest problem their owners will face is fueling. While I plug my Tesla in in my garage every night, just as you plug in your phone (and I can also plug in anywhere else there’s electricity—including Tesla’s excellent network of Superchargers), Mirai owners will need to find a hydrogen station. At the start, that won’t be easy.

Once fueled, the Mirai will accelerate from 0 to 60 mph in 9.0 seconds, slightly quicker than a Prius. It will seat four, and the hydrogen probably won’t pose any more safety hazard than gasoline does in gasoline-powered cars. They seldom explode, but roughly 9,000 catch fire in typical year.

Oh, and as far as looks go, I think the Mirai resembles a futuristic bottom-feeding fish—and I’m sure some people will like that.

toyota miraiSo, who will win?

This is not necessarily an either/or equation. It’s possible that battery electrics and fuel cell electrics will both have their place in the future, along with a dwindling percentage of internal combustion vehicles.

But one of Toyota’s challenges is the risk of cannibalizing its current well-established business. While Tesla was able to start with a clean slate, Toyota has legacy systems everywhere, some of which will help it produce a competitive desirable vehicle, and some of which won’t.

The future will be interesting.

The Great Chocolate Shortage

no more chocolateThe world is running out of chocolate!

That was the gist of the scary headlines last week, courtesy of writers who combined increased consumption in regions like China with fungus in Costa Rica and droughts in West Africa—conflated by the specter of Ebola (!)—to reach their calamitous conclusion.

But I’m not buying it (their argument—not chocolate).

I remember the great lime shortage scare of earlier this year.

And I remember the great banana shortage scare that preceded it.

Yet limes and bananas never disappeared from local store shelves.

Admittedly, lime prices rose for a while, but the talk about bananas (based on the fact the industry has standardized on one variety—monoculture) was just that, talk.

So I expect that I’ll always be able to buy my beloved chocolate.

Because where free markets exist (not Russia, for example) markets adapt surprisingly quickly.

And I’m confident that chocolate markets are robust enough and global enough to adapt to the fluctuations of both supply and demand.

In fact, one peek at a chart of cocoa futures confirms it. There’s no problem here!

nib chart

 

This chart, which shows a distinct drop of 17% over the past month, may in fact augur a coming oversupply—or something else.

In any case, I don’t see any cause for fear. Contrary opinion (or at least skepticism) proves once again to be the proper attitude to a scare story.

The human mind is inspired enough when it comes to inventing horrors; it is when it tries to invent a heaven that it shows itself cloddish. -Evelyn Waugh

Don’t Blame the Home Appraisers

Remember back in mid-2007, when the housing bubble was peaking, and the first inklings of trouble surfaced in the sub-prime mortgage industry? Few observers at the time imagined how far prices would fall. But as the dominoes tumbled, we soon learned that everything was tied to real estate values that had been propped up by loans that couldn’t be paid.

house pricesAnd now that the real estate boom-and-bust cycle has run its course, I can say confidently that there won’t be another real estate cycle of that magnitude in the U.S. until you’re dead.

That’s just human nature. Having lived through a catastrophe, we take great pains to avoid seeing it repeated. In the stock market, for example, there was the Crash of 1929, and it wasn’t until 2000, 71 years later (one lifetime), that we had a similar crash.

Which brings me to the reason for this column.

As part of the Dodd-Frank law enacted in 2010 in the wake of the real estate crash, bank regulators were required to establish minimum standards for the regulation of the home appraisal companies.

They haven’t done it yet—it’s only been four years—but they’re working on it.

The dream (my word for it) of these bureaucrats is that home appraisers in the future will somehow magically not appraise properties at higher values when people are willing to pay higher prices, and conversely, that they will somehow not appraise properties at lower values even when people no longer want to pay higher prices.

In other words, they want the appraisers to ignore the market.

The current proposal mandates that appraisal management companies use only state-licensed appraisers with “the requisite education, expertise and experience necessary” to complete appraisals competently.

Leaving aside the question of whether expertise is different from experience—or was just stuck in because they couldn’t think of a third word (independence might be nice)—I have no doubt this effort will generate plenty of paperwork but will do little to change the real problem.

Because the real problem is too complex! In fact, all of the following were to blame!

The post-World War II housing boom sparked the start of the uptrend as supply struggled to meet demand.

The baby boomer generation continued it.

Bank deregulation in the 80s rewarded financial institutions for getting into more aggressive, more profitable, lines of business.

The Tax Reform Act of 1986 eliminated the tax deduction on interest on credit cards, leaving home mortgages as the main deductible interest.

The Taxpayer Relief Act of 1997 increased the capital gains exclusion for home sales, encouraging not only the construction of larger homes but also the financing of second homes and investment properties.

The government itself explicitly encouraged home ownership, in particular by requiring Fannie Mae and Freddie Mac to provide an increasing amount of their financing to low-income borrowers and by using the Community Reinvestment Act to steer money to low-income neighborhoods.

Historically low interest rates meant people were desperate for higher-yielding alternatives, and particularly in the wake of the 2000-2002 stock market crash, real estate looked like the only game in town.

Last but not least, there was the mental state of the entire country, which had become increasingly convinced over more than 50 years that “real estate never goes down.”

The ultimate result of the long uptrend was the evolution of flipping—the practice of buying a home to sell it quickly for a profit—and eventually the feature of flipping as TV entertainment!

I feel sympathy for young couples that bought a starter home in that climate; it’s not their fault that they matured at exactly the wrong time. But I have no sympathy for the “players” who were trying to make a quick buck in that environment. It’s the same at the end of every long-term bull market.

And making new regulations for home appraisers won’t change human nature.

The Psychology of Investing

The Imp of the Perverse is a short story by Edgar Allan Poe, published in 1845, that explores the subconscious desires of people to do exactly what they should not.  I read it in college, and have no desire to read it again. But the title has stuck with me, and I bring it up today because Poe was a pioneer of psychological thought—and psychology is a critical component of investing, for better or worse.

Imp of the Perverse by Arthur RackhamThe name of this blog, remember, is Contrary Opinion. It’s named that because doing the opposite of the crowd at market extremes is a highly profitable strategy, though devilishly difficult to execute. Contrarily, following the crowd, while wondrously comfortable, is a sure road to mediocre performance, at best.

But it’s not enough to act contrarily all the time, because in the middle of trends, the crowd is actually right. It’s only at the end of trends, when emotions and perceptions reach a fever pitch of optimism or pessimism, that it pays to act contrarily. So listening to the Imp of the Perverse, who is constantly telling you to do the socially wrong thing, is not a successful strategy. Instead, it’s best to take a sober measure of the crowd’s temperature continuously, and act only when maximum emotions are observed—and then only if the charts confirm your judgment.

For example, back in late 2008, when the subprime mortgage crisis brought down first the entire housing industry and then the entire U.S. economy, negative sentiments reached extreme levels.  And through the winter of 2008-2009, sentiment remained terrible. But when the stock market began advancing in the spring of 2009, that strength was a great buy signal, even though the fundamental news (and sentiment) was still terrible.

More recently, in 20012, Apple (AAPL) was a darling of investors (who had profits) and consumers (who loved the company’s products). But AAPL was so popular that at the peak in 2012, there were no more potential buyers of the stock; everyone who could buy had already bought! Which meant there was a preponderance of potential sellers! So when AAPL actually turned down in late 2012, it was great sell signal. Within seven months, America’s most loved company saw its stock fall 45%!

Today, investors as a whole are rather bullish about the market, because they’ve enjoyed good profits this year, but the man on the street is still not invested, so I can’t say that sentiment is particularly high. Contrary opinion is not always useful.

But it is interesting to note that Apple (AAPL) remains one of the most popular stocks among users of stockcharts.com. And that tells me that the stock is still far too popular to be a good buy. In fact, it reminds me that one of the handicaps people have when it comes to investing is their inability to see enough options.

They think, “Apple. It’s a good company, and its stock is down from 700 to 520, so it’s probably a good buy.” But these people have no system, aside from the system that works outside the market—buying things cheap is usually good—and worse, they have no idea that there are thousands of other stocks worth considering, stocks of companies that aren’t as well known as Apple.

What you really need to look for in a growth stock is a company that’s growing fast but is not yet universally known and is not yet well respected by most people. If you have these conditions, you have more potential buyers than sellers—and if the stock is going up, you have conditions that will likely attract more buyers soon, to fuel the uptrend.

For example, Tractor Supply Company (TSCO) is not as big or as well known as Home Depot. But it runs 1,245 stores in 47 states, serving the “lifestyle needs of recreational farmers and ranchers.  The Company also serves the maintenance needs of those who enjoy the rural lifestyle, as well as tradesmen and small businesses.  Stores are located in towns outlying major metropolitan markets and in rural communities.  The Company offers the following comprehensive selection of merchandise: (1) equine, pet and small animal products, including items necessary for their health, care, growth and containment; (2) hardware, truck, towing and tool products; (3) seasonal products, including lawn and garden items, power equipment, gifts and toys; (4) maintenance products for agricultural and rural use; and (5) work/recreational clothing and footwear.”

I like TSCO because it’s growing, and can grow more just by opening more stores. I like it because it’s not well known. And I like it because the stock is going up.

But if you invest in TSCO, particularly if you’re a city dweller, you’ll get little or no social reinforcement of your decision, and that can make it psychologically difficult. Nevertheless, it’s a truism that the best investment decisions are the ones that make you uncomfortable. Think about it. And if you want more expert advice, head over to cabot.net.

 

Tesla Motors Hit by Lawsuit

by Timothy Lutts

Tesla Model S on fireThis is a picture of a Tesla Model S in flames, after it ran over some road debris near Seattle back on October 1, 2013.

Since then, there have been two more Tesla fires. One was in Mexico at 4 AM. It occurred after a speeding driver drove across a roundabout and collided with a tree—not exactly recommended behavior. The other, in Tennessee, occurred after a Model S drove over a tow hitch on the highway.

In all three cases, the puncturing of the car’s battery pack resulted in a fire. And in all three cases, the occupants of the escaped unharmed, reinforcing supporters’ convictions that these cars, as the National Highway Safety Administration concluded, are the safest cars on the road. Also, in all three cases, the drivers were anxious to take possession of a replacement Model S.

But just last Friday, Tesla Motors was hit by a lawsuit from the firm of Pomerantz, Grossman, Hufford, Dahlstrom & Gross, alleging that Tesla’s management made false and misleading statements and failed to disclose material adverse facts about the company’s business. According the suit, which is open to shareholders who bought between May 10 and November 6, the cars’ battery packs suffered material defects that led to the fires, and the company’s failure to warn about that risk was misleading.

The lawyers also threw in a claim that “Tesla was unable to maintain a level of automobile deliveries sufficient to satisfy analyst concerns,” which to me is just silly. Tesla’s deliveries are growing at a nice rate, and the company’s job is not to satisfy analysts.

As to the fires, it’s worth knowing that there are roughly 150,000 car fires in the U.S. every year. These fires kill an average of four people every week. They don’t make national news; they’re far too common. But as battery-powered Teslas are new and unfamiliar to people, the three Tesla fires have made news.

But this lawsuit is not really about the automobiles; they’re marvelous vehicles, and everyone who has driven one wants one. This lawsuit is about money!

Specifically, it’s about getting investors who bought the stock relatively late to band together and complain about losing money in the stock’s decline since its peak of 192. If they win, the lawyers who initiated the suit get a nice payday.

winds-blow-hardWell, here’s my two cents, starting with one of the instructive buttons on my wall.

It reminds me that when a person or company is flying high, forces will eventually appear that work to knock that person or company down. I’ve seen it happen time and time again with both small hot stocks (Hansen Natural, for example) and big well-known stocks (like Apple).

When those forces arrive, the stock retraces a large part of its uphill climb, and that’s what Tesla is doing now. After gaining 466% this year, TSLA is now trending down, “helped” by stories about battery fires, stories about potential battery shortages, and stories speculating (among other things) that fearsome competitors like General Motors (LOL) will suddenly come out with competitive products.

Now, you can argue that this decline is not rational, given that the company is still growing at a good pace and projections for the future are bright. But the stock market is never rational, and success in investing does not come from being rational; it comes from understanding the irrationality of the market and using that knowledge to make intelligent investment choices.

For me, it was rational to buy Tesla late last year when the stock was just getting going and upside potential was huge. To many people, it looked irrational because there were so many unanswered questions about the company. But in the months that followed, more and more people discovered how good the cars were and recognized the company’s growth potential, and a lot of them bought the stock, pushing its price higher and higher. Also helping was a broad bull market.

But when the stock was up 400%, sitting on a high hill, and the object of admiration and adulation by so many people, buying was not so intelligent, because at that point, there were a lot of investors with profits in the stock, ready to cash out when the stock turned down.  And then the stock turned down.

This is a normal phenomenon. It happened with Hansen Natural years ago. It happened with Crocs. It happened with Apple more recently. And now it’s happening with Tesla. On the way up the mountain, the good news and the profit engender more good news. And on the way down the mountain, the bad news and the stock losses engender more bad news, and lawsuits (and today, even a little story about George Clooney, who was dissatisfied with his early Tesla Roadster, which from today’s perspective we might call a beta version.) Also helping is a weaker stock market, especially for growth stocks.

History tells me that Tesla’s downtrend will eventually run its course, and at the very bottom, the news will be bad. That’s when stocks bottom. But getting from here to there will take time, and there’s no use arguing with the stock while this evolution takes place. It takes time for the crowd to change its mind. And it will take time for this lawsuit to run its course.

Eventually, assuming that Tesla will continue to grow both revenues and earnings, the stock will begin a new uptrend. But until then, there are more attractive investments than Tesla.

Tesla Cold Weather Test

by Timothy Lutts

Tesla cold weather testI woke up this morning to find an email from a very smart investing friend in my inbox, linking to a great video about a Tesla cold weather test, driving the Tesla Motors Model S in snow in Norway. It’s not only very illuminating in regard to the car’s performance, it’s also quite funny. (Note, unless you speak Norwegian, you’ll have to read the subtitles.)

FYI, My wife and I both drove the Model S a few weeks ago and were very impressed. One major feature not mentioned in the video is the car’s quietness. Because it’s powered by one electric motor, and that’s at the rear of the car, there is none of the NVH (noise, vibration and harshness) that we’re all so accustomed to in automobiles. It does exactly what you want at all times, quietly and smoothly and comfortably.

Folks on Wall Street are beginning to recognize that this company is changing the world, and eventually, the folks on Main Street, who have embraced the appliance-like Prius, will recognize it as well.

More Tesla Articles:

Driving the Tesla Model S- Earlier this year, Motor Trend named the Tesla Model S the 2013 Car of the Year and Automobile Magazine named it the 2013 Automobile of the Year.

Buying a Tesla- Very soon, I’ll be driving a car that doesn’t have a 12-volt battery. Instead, it will have 6,831 lithium ion batteries made by Panasonic, and it won’t have an engine.

Bullish on Tesla- Tesla was founded and is led by Elon Musk, the genius who invented PayPal. There were co-founders but Elon is the man at the helm today.

Bullish on Tesla

by Timothy Lutts

This was published on February 13, 2012, back when TSLA was trading at 35. It was titled, “Romance, Transition and Reality”.

Moving on to a recommended investment, I’ll start by saying I could recommend 100 stocks today. That’s how strong this market is. Among well-known names alone, I could recommend Whole Foods Market (WFM), Ulta Salon (ULTA), Caterpillar (CAT), Home Depot (HD), FedEx (FDX), Lululemon (LULU) and Michael Kors (KORS).

All are growing, all are strong, and all have been recommended in Cabot advisories.

But instead I want to talk a bit about Tesla (TSLA), the electric car company.

The high points, quickly, are these:

Elon MuskTesla was founded and is led by Elon Musk, the genius who invented PayPal. There were co-founders but Elon is the man at the helm today.

The company is headquartered in Silicon Valley, and run like an Internet company, not an old-fashioned car company.

Its strategy of developing, building and selling high-priced cars first and then letting technology trickle down to lower-margin mass-market cars is working brilliantly; in fact, fourth quarter earnings were released last week and they were very good. Furthermore, Musk promises a profit for 2013!

And the company’s engineering is so good that Mercedes-Benz has contracted for Tesla to develop a new, all-electric powertrain, and Toyota has contracted to buy production powertrains in the second quarter of 2012. This is a great endorsement of Tesla’s cost structure; there are no pensions, and the work force is young, non-union and healthy.

But here’s what I like best about the company, and why I think it’s a long-term winner.

The company has made no mistakes!

Its cars perform superbly … while Chevy Volt, for example, has battery fires.

Management has achieved every target it has set, while Fisker has laid off people because it failed to meet a government load deadline.

To me, this speaks of top-quality management, and in the end, management is what you’re investing in. So far, Tesla’s management looks golden.

And the stock looks good, too.

It came public in June 2010 at 17, and is now trading at 35, just 4% off its all-time high.

Now, some people will say the stock is too expensive. After all, 2011 revenues were $204 million and the market is now valuing the company at $3.7 billion.

By comparison, you can buy General Motors for 28% of sales, and Ford for 35% of sales.

But I think valuation is irrelevant at this point.

What is relevant, contrarily, is the concept of Romance, Transition and Reality, a concept pioneered by my father, Carlton Lutts, who was both a romantic and an engineer.

He wrote, “A stock, like love, thrives on romance and dies on statistics.”

Which means that stocks that catch the public’s imagination can soar to extremes way before such soaring is justified by the numbers. It’s all about perception, and it happens with every new technology and in every bull market.

I’ve seen it in networking stocks; the original king was Cisco.

I’ve seen in data storage stocks; remember Iomega?

I’ve seen it in solar power stocks; First Solar shone brightly.

I’ve seen it is footwear; Crocs ran ahead of all the rest.

I’ve seen it in medical technology; remember Intuitive Surgical?

I’ve seen it in online brokers; investors in Schwab raked in the money.

I’ve seen it in communication stocks; remember Qwest and XM Satellite Radio?

And I’ve seen it in Internet stocks … America Online and Yahoo and Amazon.com, to name a few.

So here we are, at the dawn of a revolutionary new era in the automobile business, and the easiest thing for people to do is look at GM and Ford, stocks they are comfortable with, and discuss valuation.

Meanwhile, the real opportunity is in the unknown, in Tesla, where the “unforeseeable and incalculable” mean great riches are possible a short way down the road. The choice is up to you.

My Warning on Apple

by Timothy Lutts

This was published on April 19, 2012, titled “What I Really Think About Investing in Apple”. Back then, the stock was trading around 590, on its way, as we all know now, to 700. But by October it was back down to 590 and heading much lower, validating my argument perfectly.

apple“The one quantifiable negative I can see is that AAPL is owned by more than 1,000 mutual funds. Also in the same category is the fact that Apple is the most richly valued company in the world, that the stock is the largest component of the major stock indexes and that it’s the largest holding of numerous institutional investors.

And what’s wrong with that?

Well, these institutions own Apple because doing so helps them match the performance of the indexes, because not owning AAPL would bring critical questions from their shareholders/trustees, and because it’s a very liquid investment.

But eventually the stock’s popularity will backfire. Eventually, a time will come when all possible owners own AAPL, when there are no potential buyers left … and that’s when the sellers will take control.

I saw it happen with IBM. I saw it happen with Microsoft, and I have no doubt that I will see it happen with AAPL. I simply don’t know when.

But I’m fairly confident that the stock’s long, profitable uptrend is closer to its end than its beginning.

But what if the stock keeps going up and you don’t own it? Does that make you (and me) wrong?

No, not any more than more than the fact you don’t own CREE, which was up 43.5% in the first quarter, means you were wrong about that.

The point is, you don’t need to own AAPL to be a successful investor. In fact, as a growth investor, I think there are better risk/reward relationships to be found among numerous less popular stocks … and I’ll recommend them as they come along.”