To isolate the best of the best in the growth stock world, Mike Cintolo of Cabot Market Letter, assesses both fundamental and technical criteria; here, he looks at some leading players in social media.
Steve Halpern: We're here today with Mike Cintolo, chief analyst of Cabot Market Letter. How are you doing, Mike?
Mike Cintolo: I'm doing great. Thanks for having me, Steve.
Steve Halpern: You look for what you call best of the best growth stocks. In fact, a lot of the big wins on your buy list are young companies showing all rapid growth. What fundamental criteria do you focus on when you're looking for these types of stocks?
Mike Cintolo: Well, in terms of things you can measure, I mean, we love to see fast revenue growth. Earnings are great, too, obviously, and most of the big winners we've had do have earnings; but triple digit revenue growth has always been one of our best criteria.
But a lot of it, too, is more subjective, and that's really where it comes down to serving mass markets with some sort of new, and ideally revolutionary, new product—whether it's a medical device or just something where a company is dominantly, Google (GOOG) was, or obviously Apple (AAPL) is an easy example. Those are really the stocks that tend to do the best in the market, and for us.
Steve Halpern: In addition to the fundamentals, you put a good deal of attention into technical factors. Can you expand on that?
Mike Cintolo: Yeah, well, technical factors are important. We think, you know, a lot of people either focus on fundamentals or technicals. We really think you need to do both. We've been doing that for 30 years.
On the technical side, it's really, the footsteps of institutional investors. No matter what you or I think of a stock, you know, Fidelity, or T. Rowe Price, or whoever, or pension funds for that matter, don't like it and they're not going to be buying it, it's not going to help us at all.
We're really looking for the stocks to have both the fundamental criteria of past big winners, but also are showing major accumulation by those funds, and that's how we use charts. Not so much in patterns, but really more just supply/demand analysis and knowing how institutions go about their accumulation campaigns.
Steve Halpern: So, to help our listeners understand how to combine both the fundamental and the technical factors, perhaps we can walk through a specific recommendation. One of the stocks that you added to your buy list is Facebook (FB), which is now up over 30% since you first recommended it. Would you tell us a little about what went into that recommendation, so listeners could understand how you applied both of those criteria in selecting and then holding a stock.
Mike Cintolo: Sure. On the fundamental side, Facebook, obviously, the story tells itself. I mean, one of the biggest mass markets out there. More than a billion people use it regularly every month. The sales growth was great. The earnings, actually, were solid too; so the story was great.
Obviously the IPO came out. It was too high, the stock fell, and it fell on hard times for more than a year. We never stopped following it or stopped following the company; we kept track of the stock, and eventually, this summer, the company came out with a great earnings report, beat sales estimates and all that, and that's when you really saw a huge earnings gap.
An earnings gap is one of those technical criteria, a sudden change in perception for the better. The volume was huge. That wasn't me and you buying 200 or 300 shares. That was Fidelity trying to get hold of 4,000,000, 5,000,000, 6,000,000 shares.
In fact, I think the stock traded something like $30 billion or $40 billion the day it capped up on earnings in stock. That sort of move—with such a big liquid institutional company, with all the sales growth, with all the earnings growth, with all the future projections, with everyone already knowing the story. The institutions are familiar with it. That is really classic.
The way I sort of expressed it, actually, in one of our investors' conference earlier this was, if you're a passing football team and you have a one-on-one coverage, you have to throw the ball. You're going to throw it to your best receiver.
You have a great quarterback. It's sort of what you do. If you're growth stock investing and you see a company like a Facebook that has all the criteria of past big winners and then shows the blastoff, you kind of have to take that trade and obviously it has worked out so far. I'm quite bullish going forward on that company.
Steve Halpern: Let's look at Twitter, which is going to have an IPO this week. You note that the company is an emerging blue chip and it has the fundamental characteristics that you like, but you're not recommending jumping on the stock right after the IPO. Could you explain the reasons behind that?
Mike Cintolo: Yeah, we're students of the market. Coming out when it first come public, of course, some stocks come public and just go up and that sort of thing.
But usually the most typical ones—Facebook was the extreme example—but usually most typical ones will take some time to digest their sort of pre-opening games, if you will, in a pattern that's really just called an IPO base or whatever you want to call it.
A stock will come out, usually will gap up from its official listing price of, you know, 22 or will open at 30. It might go up a little further, but then it will take two, three, four weeks, sometimes longer; but a lot of the times the best ones will just pause for two or three or four weeks.
Google did this. A lot of others have one this and then they'll take off again. That's really what we'll be looking for.
The point is, though, you don't really know what the institutions are thinking until you let the stock trade for a little bit and just see, do they already own too much, do they want to sell it, they think it's too expensive, or conversely, they're thinking, hey this is a bull market and it's an emerging blue chip and we need to build the position.
That's what we'll be watching for. I am quite bullish on it, speaking of mass markets. It's huge. The potential there is huge. The revenue growth is triple digits, but we'd like to see how the stock trades before recommending it to subscribers.
Steve Halpern: Okay, we'll check back in with you after it has traded for a few weeks. We really appreciate you joining us today.
Mike Cintolo: Thanks, Steve.
Steve Halpern: Thanks.
