PowerTrend Brief: Knowing the Difference between Short-Term and Long-Term Opportunities

Posted: Feb 01, 2014 12:01 AM
PowerTrend Brief: Knowing the Difference between Short-Term and Long-Term Opportunities

One of the more frequent questions I get from investors like you, as well as the institutional ones I have known for many years, is: how do I decide if something is a short-term or long-term opportunity? It is a timely question, even when the stock market is humming along like it did in the last half of 2013. But these days, with the return of volatility to the market, it’s even more crucial to understand the differences between the two. It is even more important not to mistake one for the other, since that situation can lead to disastrous results and a loss of capital.

As I just mentioned, volatility has returned during the last few weeks, as evidenced by the sharp move higher in the volatility index (see chart below). Reasons for this move include renewed concerns about global growth, a growing number of companies slashing their short-term outlooks and issues in the emerging markets, as well as worries about a potentially stepped-up timetable for the Federal Reserve to complete its tapering plans. While I continue to think the pace of the Fed’s curbing efforts will remain data-dependent, the overall combination of factors has pressured the U.S. stock market lower, and the S&P 500 Index now is down about 4% from the end of last year as I share this update with you.

Pullbacks in the stock market can be a solid and a very profitable ally to the patient investor. To me, a patient investor is someone who has the stomach to deal with short-term volatility, much like what we have seen recently, as well as the patience to let the underlying investment thesis play out. You always have to know why you are buying a stock and what the sign posts to watch for are to make sure the story is on track. It is very much in sync with the “buy and hold” strategy, except that I recommend my PowerTrend Profits subscribers use any material pullback to scale even further into a position. It is an investing technique used by professional investors that lets you reduce your average cost basis, while increasing your exposure to that particular security. Of course, you should only do this when the underlying reasons to own that stock are still intact.

Long-term investing can drive huge profits over several years. Here’s a great example -- mobile technology. Many people were first as wowed by the mobile phone as I was back when it was on the verge of becoming a mainstream, must-have gadget. A basic mobile phone eventually was replaced by the smartphone. Now we have the tablet. As mobile communications has grown, we are once again on the cusp of several new applications for this technology -- the Connected Home, The Connected Car, wearables and the Internet of Things. For a patient investor who first bought shares of wireless semiconductor company Qualcomm (QCOM) in early 1998 when the shares were trading below $3, you would have made 25x your money, not including dividends, if you still held the shares. Now, that’s the exception. Not everyone is going to hold every stock for that period of time. Generally speaking, long-term tends to last between one and three-plus years.

A long-term opportunity that currently is unfolding is cybersecurity. By now, I am sure you heard about the cyber-security breaches at Target (TGT), Niemen Marcus and craft store Michael's. That cross section shows that cyber security is becoming a bigger and bigger concern. And I love to profit from pain points. In late 2012, Defense Secretary Leon Panetta warned the United States likely would face a “cyber-Pearl Harbor” and the country was increasingly vulnerable to foreign computer hackers. Per Panetta, likely targets included the nation’s power grid, transportation system, financial networks and government. Cybersecurity provider McAfee, which is a wholly owned subsidiary of Intel (INTC), predicts the pace of cyber attacks will only accelerate in 2014, compared to 2013 and 2012. From mobile malware to the continued rise in cyber-criminal gangs that will target enterprises and the likelihood that social media attacks will be ubiquitous by the end of 2014, the McAfee Labs 2014 Threat Predictions report underscores Panetta’s 2012 warning.

These pain points, such as cyber threats, hacks and thefts, make for solid long-term investing if you can recognize the coming structural shift and ripple effects that may take several years to realize. In hindsight, mobile technology was a no brainer, but what’s key is separating long-term potential from the hype machine that is CNBC, Fox Business and others. As cyber attacks become more pervasive, I see cybersecurity stocks generating big profits in the coming years.

What’s a short-term opportunity? One of the better examples of a short-term opportunity has been happening around us the last few weeks -- the harsh winter temperatures. January 2014 has brought with it record-breaking cold weather in many parts of the country, particularly in the Midwest. That sustained, bitter cold weather will weigh on the shares of homebuilders, which likely have missed expected building days and delivery dates. At the same time, the sustained cold will hit Americans where it hurts most -- the wallet -- when they get their upcoming heating bills. That pain point makes for a short-term opportunity in utility companies that are experiencing a spike in demand as you and I try to keep warm. Because spring will eventually come, there is a relatively short window of opportunity for this trade.

Investing or Trading? Notice the words I used with long-term and short-term opportunities -- investing and trading. They are two very different things with different time horizons and that means two different mindsets. For those interested in long-term opportunities, I recommend that you check out my PowerTrend Profits newsletter because its time horizon is 12-24+ months. For those looking for quicker profits, consider PowerTrader and its track record of producing a significant number of triple-digit percentage winners.

The Big Deal behind Big Data with Arnab Gupta, founder and CEO of Opera Solutions
Every so often, there are key words and phrases that get big play around the media. Before you know it, they are in use almost everywhere. These terms include irrational exuberance, outside the box, deliverables, skill set, metric, multitasking, bandwidth, selfie, spyware and more than a few others.

I’m sure during the last few years that you’ve heard those words and phrases time and time again… so much so that the meaning behind those words became dulled, if not lost.

There’s another term that has been gaining in popularity during the last year or so, and believe you me, it is one that will impact your very life -- big data.

I know you’ve heard those two words -- big data -- before, and it’s been used by companies like Cisco (CSCO), Facebook (FB), Google (GOOG), Oracle (ORCL), IBM (IBM) and others. In this age where more and more things are connected, monitored and captured, what is big data? How is it used? What does it mean for business and for the consumer? How will it change things?

These are the questions we need to understand. Joining me on PowerTalk to sort through all of it is Arnab Gupta, founder and CEO of Opera Solutions. As Arnab said, it’s not just you and me that are figuring out what big data is, companies are in the same boat -- they know they need to spend on it -- and they are, but how do they get value from it? How do companies use it to make better decisions, work more productively and take better actions? How does a company go from spending on big data to making it a competitive advantage for its business?

Arnab and I not only discuss all of this, but he addressed how he thinks big data will force companies like Oracle, IBM, SAP and others to expand and change their capabilities, lest they risk becoming the next Kodak (KODK) or the next Blackberry (BBRY).

Click here to listen to my one-on-one conversation withArnab Gupta, founder and CEO of Opera Solutions

In case you missed it, I encourage you to read my PowerTrend Brief posted last week on Eagle Daily Investor about how you can make it through a rough market. I also invite you to comment in the space provided below my column at Eagle Daily Investor.