Too hot to hold?

Forget buying low and selling high. The smart money aims high and sells higher

Globe Investor Magazine, Nov. 21, 2007

A COUPLE OF YEARS ago I was taking my kids to McDonald's when we passed a new restaurant. It was called Chipotle, and people were lined up outside the door. My daughter likes Mexican food, so we passed on McDonald's and went there instead.

Even though I live in Arizona, I'd never seen a restaurant like it. I got everything the way I wanted it, it tasted great, and it was quick. I asked the guy at the cash register, "Who owns Chipotle?"

He answered, "McDonald's," and I thought, "Rats."

When I got home I looked at McDonald's stock and saw it was in the 20s-nowhere near an all-time high. I also learned Chipotle had only 70 restaurants to McDonald's thousands, so the new chain wouldn't make much difference to McDonald's stock. Still, I wrote on my blog, "Someone at McDonald's should get a raise for buying that company."

Six or eight months later, after I'd been eating at Chipotle once a week with my daughter, I heard McDonald's was about to take it public. When I wrote about it, I said, "It doesn't matter what happens with this IPO. Whatever price it comes out at, it's a buy."

Let me introduce you to trend investing. It's what I do in my hedge fund-I buy stocks that are on strong business trends-and it doesn't take an MBA to do it. (Though I do have one!)

In this case I was confident Chipotle's stock was a buy after eating there frequently, saw how the restaurant was run and noted the simple menu: burritos, tacos, chips and salsa. But what excited me most was that Chipotle only had a presence in a few southwestern states, leaving room for growth. When you find a chain that was run the way Chipotle was and was only available in a few states, you know that you're on to something.

What's happened since the IPO? Well, as of press time, the stock has almost tripled in about eight months. I've sold down some of my original position, but still hold most of it. It may be trading at record prices, but I believe it's going still higher. In fact, if you look at my portfolio today you'll see I prefer to buy and hold stocks that are trading at all-time highs.

Plenty of investors would think I'm nuts. After all, they're pounded daily with the mantra, "Buy low, sell high." But take a stock like Google. Many people look at the incredibly high price to earnings ratio and tell you it's overvalued. Still, what does that really mean? Was Google overvalued at its IPO? Check news stories from the time: almost everyone said it was. The stock is up 500% since then.

Finding the next great trend stock isn't about looking at the list of pending IPOs. It's about looking for stocks that are winners and that will continue to keep winning. The best way to do this is by reading the list of stocks hitting record highs. If you spend a few minutes a day reviewing that list-and the names and industries that dominate it-you'll develop a feel for the market leaders and the actual health of the market.

To pick and hold one of these stocks you need to do your homework. Blindly buying all-time highs doesn't guarantee you'll latch onto the next Starbucks, Apple or Research In Motion. Focus on opportunities you understand. Why is a particular business so strong? If you can answer that, you're halfway there. Next, pick stocks that have strong bases, meaning they've been moving sideways for the last six months to a year.

Then sit and hold. Holding the next Chipotle is actually harder than finding it. Blocking the noise made by analysts, television, blogs, magazines and newspapers requires discipline. Your reward for mastering trend investing, however, is the ability to see past shallow investing maxims to find real value in all-time high stocks that, like Chipotle, are poised to serve up significant profit.

HOWARD LINDZON is the creator of Wallstrip.com, a web show on stocks, and the founder of investment firm Lindzon & Associates in Phoenix, Arizona