Cabot Wealth Advisory 5/3/07 - Poetry and Manual Labor May 3, 2007

Salem, Massachusetts

By Timothy Lutts

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Being Right or Making Money

The $11 Billion Retailer Whose Stock Jumped 27%

Crossing the Blood-Brain Barrier

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Today we open and close with quotations from Alfred, Lord Tennyson.   

First comes the oft-quoted . . . and oft-misquoted, "In the Spring a young
man's fancy lightly turns to thoughts of love."  He might have added
baseball - here in Massachusetts the Red Sox are way out in first place
while their archrivals, the Yankees, are last - but Tennyson was English. 
For the same reason, he wouldn't have mentioned football, though the
recent acquisition of Randy Moss has renewed fans' hopes that the New
England Patriots will regain the Super Bowl trophy this year.  And he
might have mentioned yardwork, but perhaps that was too pedestrian a
subject for him   It's not for me.

In recent days I've been cleaning the yard of winter debris - particularly
debris from the big old silver maple - clearing the perennial garden of
last year's leftovers, putting out lawn furniture, repairing the walls of
my tiny pond and preparing the blueberry patch by "mowing in" the
Christmas tree branches as mulch.   

One sad job was cutting down the beautiful weeping cherry tree that had
succumbed to two years of attacks by winter moths.  No buds this spring,
no life, so down it came.  Part one, felling the tree with a chain saw,
was easy.  Part two, removing the root ball, is hard work, and not yet
complete.

But when I enlisted my son - and a friend of his who was visiting - to
help with the manual labor, he complained (though only once),   
"When I go over to my friends' houses, their dads never make me work."  I
countered with the traditional, "It builds character."

What I mean, of course, is that shared labor brings shared rewards and a
sense of accomplishment.  And in these digital days, physical labor
provides a needed respite from the world of pixels that absorbs so much of
both his and my time.  Furthermore, this is what I did with my father -
cutting wood, digging holes, mending fences.  In enlisting his help, I'm
also passing along family values.

As for dragooning a visiting friend when the opportunity arises; that way
I get two bodies and - theoretically - twice as much work done.   
And maybe it builds the friend's character, too!

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Character, of course, is a commodity that has been in short supply in some
corners of the investment world in recent years.  Thus the implementation
of Sarbanes-Oxley in 2002.  The law undoubtedly has its good and bad
points, and I have no reason to get into them today.  But thinking of this
- for some reason - gets me thinking of the title of one of my favorite
books on investing, and that leads to a subject worth discussing.

The book is "Being Right or Making Money," authored by Ned Davis in 1991. 
Some parts of it are dated, while others are timeless, but to me, the most
valuable part of the book is the title!  If it makes sense to you right
away, congratulations.  If not, let me explain.

We all have opinions about the market and about individual stocks.   
Given a little prompting, most of us will express them!  But what are
these opinions worth?  Usually very little.  More importantly, given a
choice between listening to the market or listening to an opinion - even
your own - what should you do?  Listen to the market!   
Especially if it means admitting that you were wrong.

The goal, remember, is not to prove how right you are or how smart you
are.  The goal is to make money.  Simple.

Being wrong is a normal part of investing.  Each of us is wrong about half
the time - some more and some less.  But there's nothing wrong with being
wrong.  The key to successful investing is recognizing quickly that you
were wrong, and taking action to get in the right.

Typically that means cutting losses short.  That's a lesson that's usually
learned the hard way; it's human nature to argue with the stock.  But
around the fourth or fifth time they get socked with losses exceeding 20%,
30% or more, most investors accept the fact that it's important to cut
losses short.

Some, however, continue to have more confidence in either themselves or
the companies they invest in than is warranted.  For example, a reader
called the office just this week, and referred to my last issue, in which
I discussed both XM Satellite Radio and Sirius Satellite Radio.  He
confessed he'd bought both stocks near their peaks, back at the 2000
market top, and was still holding them today.

By my calculations, XMSR is down 77% from its peak, while SIRI is down
96%.  Both companies make great products, but both have turned out to be
superbly bad investments, in part because both managements have spent so
much money, and in part because both came public when investor sentiment
was - in retrospect - sky-high.

If you've been investing awhile, you've heard about cutting losses short,
and I apologize for taking your time if you've already learned the lesson.
 But if you haven't learned, and especially if you're a newer investor . .
. please pay attention.  If you're young and so inclined, you might even
want to tattoo these words on your bicep.   
"Cut losses short."

The goal is not to prove yourself right. The goal is to make money.


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-----

And now, on to some stocks.  On Monday of this week the computer told us
to write up Amazon.com in Cabot Top Ten Report.  That's the publication
that analyzes the market's ten strongest stocks every Monday, and the
reason for Amazon's inclusion was no surprise - the stock had surged 27%
in one day after announcing a pretty good earnings report.  Not shockingly
good, but much better than expected.

Revenues grew 32% to $3.02 billion, while earnings jumped 117% to $0.26
per share.  The reason for the divergence in growth rates?  An after-tax
profit margin that swelled from 2.2% to 3.7%.  In retail, that makes for
an enormous improvement.

So who drove the stock up 27%?  Institutions, who love a stock like this. 
With a float of 307 million shares, there's plenty of supply to go around.
 And with virtually guaranteed growth of revenues every year, it's hard to
go wrong in the long run.

In the short run, Amazon's chart is interesting.  After peaking at 61 in
October 2003, the stock fell for nearly three years, bottoming at 26 in
August 2006.  And in the eight months since then, Amazon has been a stock
on the rebound.  Last week's spike higher put the icing on the cake,
actually sending the stock up above its old 2003 high of 61.  And that's
where it sits today, catching its breath.

But do I like it as in investment?  Not really.  I used to, years ago,
when people were still afraid that Amazon would never earn a dime.  The
time to buy was when there was skepticism about the company.

Now there's no skepticism; institutions are falling all over themselves to
get a piece of this company.  I still like Amazon as a convenient place to
shop, just like millions of other people around the world . . . 45% of the
company's business is now international.   

But as an investment, I prefer the road less traveled.

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Which brings me to Xenoport.  Most investors have never heard of XenoPort;
I know I hadn't until Monday.  But there it was, chosen, along with
Amazon, as one of the market's top ten stocks.

So we wrote it up, learned why it was so strong, and became intrigued
enough to pass this knowledge on to you . . . with a warning.

XenoPort (XNPT) is a young company working to develop new drugs.   
It's never sold a single product and never made a single dime, and if it
fails to do so, its stock will almost surely sink.

However . . . the stock is strong today because investors with high hopes
have been buying.  Here's what we wrote in Cabot Top Ten on Monday.

 "XenoPort, located in Santa Clara California, is working to develop drugs
that treat central nervous system (CNS) disorders.  It's working on
treatments for gastroesophageal reflux, neuropathic pain, spasticity,
Parkinson's disease and migraines.  But its biggest product, and the one
that caused a stir last Wednesday, is XP13513, a formulation designed to
treat restless leg syndrome (RLS).  The company reported that it ran a
twelve-week, double-blind, placebo controlled study on 222 patients, and
at the end of the study 76% of patients receiving XP13513 were "much
improved or very much improved" while only 39% of patients receiving the
placebo reported the same result.  And that's statistically significant. 
The science behind this achievement is proprietary (of course) Transported
Prodrug technology that uses the body's natural mechanisms to actively
transport nutrients through cellular barriers, and if it can work for a
wide variety of drugs, this company could be really big.  That's one
reason for the market valuation of over $1 billion today!  First quarter
earnings results will be released May 8, but we don't expect anything as
big as last week's announcement . . . XNPT came public at 11 in June 2005,
and has jerkily made its way up to the current level since.  In the early
days trading volume was very light, and even until last week it was below
the threshold we require for orderly trading. But now it's hit the big
time.  Last Wednesday's announcement saw the stock soar from 29 to 42, and
if you're in the mood for an aggressive speculation, you can take a small
position here,"

Digging a little deeper into the story, we see that XenoPort's science is
focused on identifying specific high-capacity nutrient transporter
proteins found in cells that line the gastro-intestinal tract.   While
traditional drugs are expected to passively diffuse through the GI wall
into the bloodstream, XenoPort aims to achieve active transport by using
target transporter cells to deliver medications more quickly and, ideally,
in more controllable doses.

XenoPort has already profiled hundreds of transporter cells in many tissue
types (including healthy and tumor tissues) and developed functional
assays for about 80 of these transporters.  One of the trickiest parts of
the business is achieving transport across the blood-brain barrier (BBB),
to access the central nervous system.  And now the company is working on
creating drugs that incorporate chemical features that allow them to be
recognized by specific transporters.  The drug for Restless Leg Syndrome
is in the most advanced stage of all the company's drugs, but there's
little doubt it will be followed by others.

 To me, it sounds like a technology with a wide - and very profitable -
range of applications.  And that piques my interest.

Today, the stock is still at 42, having pulled back slightly from last
Thursday's high of 44.  That's solid action, technically, and reason to
believe that the uptrend will continue.

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Editor's Note

Cabot Top Ten Report comes to your email inbox once a week with capsule
analyses of the market's ten strongest stocks.  Some are big, some are
small, some are young and some are old.  Our job is to describe why each
one is strong, to give you an idea of how likely that strength is to
continue, and to provide a follow-up in each issue until we tell you to
sell.  It's the single best way we know to find great growth stocks in
their early stages . . . stocks like Hansen Natural, Titanium Metals and
Ultra Petroleum.  To get started with a no-risk trial subscription, simply
click the link below.

http://cabotmail.net/t/171995/13148861/81/0/

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And here's the second quote from Tennyson. "Blind and naked ignorance
delivers brawling judgments, unashamed, on all things all day long"

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

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