Back in March 2009, if someone had suggested that the Chinese jewelry company Fuqi International (FUQI) was about to embark on a six month run that would blast the stock to a 10x gain, they wouldn’t have found many takers.  Seventeen months after its IPO, with three failed attempts to break through resistance at 12, FUQI was a flat-volume casualty trading just above 3.

But by the middle of September 2009, FUQI was just nudging 33 on huge volume.  Ten baggers are rare enough, but to get one from a Chinese jewelry company was shocking.

Today’s stock is LJ International (JADE), a smaller company (sales of just $125 million annually, compared with Fuqi’s $467 million).  This Hong Kong-based manufacturer of jewelry from gold, platinum and precious stones has been booking some excellent earnings numbers.

LJ’s four most-recent quarters have produced earnings growth of 150%, 50%, 600% and 800%, with after-tax profit margins of 7%, a multi-year high.

Earnings like that will get investors’ attention, and the trailing price-to-earnings ratio of 10 (and forward P/E of doesn’t hurt either.

JADE is just organizing a nice breakout above its long-time resistance at 3, while FUQI is completing a monumental flop to 6 having been tainted by some bookkeeping questions.

I like it that JADE is resisting the market’s volatility and inching above long-term resistance.

I don’t like that it’s a very low-priced stock (which will keep many institutional investors from signing on) and that trading volume is low (just 124,000 shares a day, on average).

But the example of Fuqi International gives some credibility to LJ International.  The Chinese appetite for gold jewelry continues unabated, and LJ International’s diversified distribution includes fine jewelers, department stores and TV shopping channels.

It will certainly be interesting to keep on your Watch List.

If you’d like more information about the stocks on the Watch List for Cabot China & Emerging Markets Report, you can grab a trial subscription here.  The Report is the top-performing investment newsletter over the past five years according to Hulbert Financial Digest.  And even more important, I have the Report’s portfolio 45% in cash right now in response to recent market weakness.  Sound good?  It’s easy to sign up.

Coming back from vacation is always hard. But for someone who, like me, works with stocks, coming back from vacation to a market that’s cranky and indecisive is doubly difficult.

There were plenty of scenic wonders on the North Rim of the Grand Canyon and in Zion National Park where my party of five spent last week. The Bright Angel overlook, Point Imperial and Crazy Jug provided the points of view and the constantly changing sunlight kept highlighting new features to appreciate. And a perpetually hungry mule named Fred and I forged a close bond on a trip halfway down a side canyon and back.

I got to see more of the Milky Way than I’d seen in years, plus condors, a water ouzel buffalo, beefalo, bats, ravens, lizards and minnows in spring-fed pools. I rubbed shoulders with people from all over the world, got up early to see the sunrise and stayed up late to see the stars. I climbed to the top of the exhausting (and exhilarating) Angel’s Landing in Zion and got knee-deep in the Virgin River.

A good vacation.

But, as I said, the sting is in the tail when you came back to a market with the late-summer croup.

The markets are suffering from the same malady that has been undercutting every attempted breakout rally since last January. Despite improved profits during the latest quarterly earnings season, investors can’t forget the potent combination of massive government debt, mountains of bad mortgages and mortgage-based securities and the reluctance of businesses to hire (or re-hire) more workers.

So, as always, the market is looking ahead by six months to a year and sees the risk of a new recession as just too darned high. So people are selling stocks and stock mutual funds and heading for the perceived safety of Treasuries or money market funds or even just tucking the cash into their checking accounts.

I don’t know what will happen, but I do know that every time the market declines, there will be a bunch of schnooks who will watch the price of their holdings decline and will do absolutely nothing about it.

Some will be deceived by hope (that things will improve). Others will fall prey to despair (that they will never get better). And many will just watch and wish that it weren’t happening, but will be unable to push the sell button and realize the loss.

Eventually, when the last of these hopeful, despairing or indecisive investors finally give up and exit the market with a vow never to come back, the market will find its support and begin to work on a new rally.

If you are a member of any of those three classes, I have just three words for you: Don’t do that!

Here is a sell discipline that is so simple that it can save you from yourself.

Go to your online brokerage account and write down the buy prices for each of your holdings.

Then multiply each of those prices by 0.85.

That will give you the exact 15% loss from your buy price that is your sell signal when the market is in a downtrend, as it is now.

For instance, the Cabot China & Emerging Markets Report bought China Valves Technology (CVVT) back in March at 13.97. The 15% loss limit on the stock was 11.9, which was tripped when the stock closed below that level in late April. (It’s important that you use closing prices, since growth stocks are volatile and can trip an intraday price level, then recover significantly.)

Our sell of CVVT above 11 got us out of the stock before it plummeted below 8 in June.

The stock bounced at that point, eventually working its way back to just below 12 before it rolled over again. But our sell discipline got us out with a minor loss and made it possible to preserve our capital to put into a stronger stock in a more supportive market.

An even better example is SinoHub (SIHI), a Chinese supply chain management and order fulfillment company that I put on the Watch List in late October 2009. The stock was too low-priced (at just 5) and thinly traded (43,000 shares a day) to make it into the portfolio, but it looked like a possible breakout candidate.

Unfortunately, SIHI began to languish soon afterward, and is now trading below 2. Fortunately, even if we had bought it, our sell discipline would have notified us to dump it long before it reached this pathetic state.

All you have to do it put a sticky note on your computer with the loss limits for each of your growth holdings, then follow the rules.

Remember, we always talk about buying opportunities. That’s because it’s fun to buy.

But we also talk about sell disciplines. That’s because selling is a drag and almost nobody wants to do it. It feels like admitting defeat.

Do it anyway. If you can’t do it, you may be better off with those Treasuries we keep hearing about.

As to the market, which is very good about following the rules of supply and demand, these are very interesting times.

Demand is down, in part because of lousy economic news (which I’m not going to go into today).

Bond yields are at record lows … a clear sign of the market’s “flight to safety.”

And it’s extremely difficult to find an optimistic economist these days.  (You know in your heart that they’re often wrong, but you listen to them anyway.)

Ben Bernanke commented a month ago that “the economic outlook remains unusually uncertain, ”and the President of Cisco, John Chambers, repeated that outlook after his company’s earnings report last week, saying, “We think the words “unusual uncertainty” are an accurate description of what’s occurring.”

The market, of course, hates uncertainty, but I’ve learned to embrace it, which is why I’ve been growing increasingly optimistic in recent weeks, particularly because the market hasn’t fallen apart.

So today I want to give you part two of my article on “Stocks to Hold Forever.”

Part one, back on July 28, told you about the amazing Mr. Phelps, whose investment strategy was to buy stocks with exceptional growth potential when they were young … and never sell them.

Qualities he looked for included:

•Revolutionary technologies or services

•New and cheaper sources of energy

•Small size, so it can grow fast

•Undiscovered by the masses

•Barriers to entry

•Superior profit margins.

And he didn’t minimize the value of buying when stocks are temporarily depressed … as they were in 1932 and, more recently, in 2002 and 2008.

Three years ago, I got together with the other Cabot editors and came up with a list of 10 stocks.  On July 7, 2007, I published this list.  And three weeks ago I reviewed the results … which were very good.

In those three years, the S&P 500 lost 24%.

But our 10 stocks had an average positive return of 39.5%.

(Details are in the July 28 issue of Cabot Wealth Advisory.)

So I got together with Cabot’s growth editors again, and we came up with a new list of nine stocks—we couldn’t agree on ten.  Two are repeats from the 2007 list—and here they are.

1. American Superconductor (AMSC) is a leading provider of the electronics that power wind power systems, where it presents substantial barriers to entry and growth potential is enormous.  The company has grown revenues every year of the past decade, its profit margins top 10% and it’s still relatively undiscovered.

2. Chipotle Mexican Grill (CMG) has the potential to be the McDonald’s of the next half-century … in part because this high-quality burrito shop was spun off from McDonald’ in 2006 … so management has been taught well.  Revenues are growing steadily and profit margins are consistently in the high single digits, which is great in the restaurant industry.  (It’s my son’s favorite restaurant, but I’m not the analyst who submitted it.)

3. Ctrip (CTRP) is the leading online travel agent in China, where a growing middle class and increased business activity mean the travel industry is booming.  Last year, the recession slowed revenue growth at Ctrip to 35%; in the latest quarter, it was back up to 47% … and profit margins were a very healthy 42.2%.  Ctrip was on the list three years ago.

4. First Solar (FSLR) is a leading manufacturer of solar power modules, boasting great growth of both revenues and earnings … and profit margins of 27% in the latest quarter, very impressive for a manufacturer.  The stock was a big winner for Cabot Market Letter in 2006 (we sold in March 2007) and like most stocks in the industry it’s spent the time since then cooling off.  I think it’s cool enough now.  First Solar was on the list three years ago, too.

5. Green Mountain Coffee Roasters (GMCR) makes the revolutionary single-serving Keurig coffee brewers, and gets a royalty for every cup of coffee that’s brewed in them, which is a great source of recurring income.  Barriers to entry are high.  The market is global.  Revenues have grown every year of the past decade.  And profit margins are healthy at over 8%.

6. Home Inns & Hotels Management (HMIN) is the largest hotel chain in China.  Growth is as easy as opening new hotels … the cookie-cutter growth model.  The company has no debt, unlike most hotel chains, and profit margins were 19.6% in the latest quarter.

7. MercadoLibre (MELI), located in Argentina, is the eBay of South and Central America—in fact, eBay owns 18% of the company.  Most sellers are businesses.  Growth is virtually assured.  The barrier to entry is very high.  And profit margins are over 20%.  MercadoLibre is the smallest company of these 10, as measured by revenues.

8. STR Holdings (STRI) makes the precisely engineered plastic film encapsulants used by most solar module manufacturers to protect their components from water, wind, radiation and shock.  Profit margins are 19%.  The stock came public just last year, so it’s not well known—in fact, it’s the most lightly traded of these 10 stocks.  But as the solar power industry grows, STRI should grow with it.  Coming off a slow 2009, revenues mushroomed 62% in the latest quarter.

9. VMware (VMW) makes software that enables virtualization and cloud computing.  It’s grown revenues every year of the past decade, and could well evolve into the Microsoft of the next decade.  In the latest quarter, revenues grew 48% while profit margins hit 21%.

So what do you do with these nine stocks?

Think for yourself.

This is in part an intellectual exercise.  In the ideal scenario, you buy them at an opportune time (even better, you already have profits in them), your profits compound over the years and you pass these stocks on to the next generation, thus escaping the bite of the taxman.

But even a shorter-term holding can work out very well, particularly when you follow a market timing strategy like that of the Cabot Market Letter, which has recommended many of these stocks. Click here for more details.

Several of my friends turned 60 this year (I’m not there yet) and to celebrate, 10 of us (five couples) will be sharing a villa in the Italian countryside for a week in September.  In fact, my mind is already in Italy, to some extent, as I’ve been reading guidebooks, pulling out old magazine clippings, surfing the Internet, and—perhaps most fun of all—using Google Maps to get a bird’s eye view of some small Italian towns we plan to visit.

One thing Google Maps reveals about these small towns is this: Because they were developed long before the birth of the automobile, parking spaces are scarcer than in most American towns.  Commonly, there are small municipal lots scattered throughout the town—particularly toward the edges—and frequently these cost money.

The result is towns that are particularly pedestrian-friendly.

Shedding some welcome light on the economics of parking in the U.S. was an article in the New York Times last week titled “Free Parking Comes at a Price” that referenced a book published in 2005.

That book, by Donald C. Shoup, professor of urban planning at the University of California, Los Angeles, is titled, “The High Cost of Free Parking.”  It’s 752 pages long.

I’m not planning to read it.  Planning my Italian trip is more fun than reading 752 pages about parking economics (and politics).  But I have read summaries of it, and I think the main idea is worth passing on.

In short, just as there’s no such thing as a free lunch, there’s no such thing as free parking.

The costs of free municipal parking lots are paid by taxpayers—even those who don’t drive.

The costs of free commercial parking are borne by businesses, and thus by their customers.

And the real unseen costs come from the unintended consequences that are suffered by all of us.  In short, legally mandated parking artificially increases supply and thus reduces the market price of parking spaces, often to zero.

In big densely populated cities like New York and Chicago, people are accustomed to paying high prices for parking.  These high market prices not only spur the development of efficient public transportation networks, they also enable higher-value use of downtown space.

But where low-value public parking is subsidized by governments, Professor Shoup argues that we forgo the true value of space that could be better utilized.  He calculates that the value of the free-parking subsidy to cars in the U.S. was at least $127 billion in 2002.

If we eliminated that subsidy, basically by repealing all the laws that mandate the provision of parking spaces by businesses, and by moving to make drivers pay the real costs of their parking spaces, the prices of some spaces would rise dramatically.  People would drive less.  There would be less traffic congestion.  There would be more room for people and business … and American towns would look just a little bit more like those small pedestrian-friendly Italian towns I plan to visit.

The basic concept to remember is that government subsidies distort market-pricing activities, and thus artificially increase demand.

We saw it in the housing market, where the perception of government mortgage guarantees increased demand for housing while lenders and borrowers joined in the party … with disastrous effects.

We’ve seen it in the higher education market where government loans have artificially increased the demand for college degrees and in the process pushed up tuition prices at both public and private schools.  (Just last week, the stocks of for-profit schools tumbled—look at COCO, DV, ESI and STRA, for example—when the Department of Education revealed it might reduce lending to students at for-profit schools with low repayment rates, providing a perfect illustration of the link between government subsidies and perceived values.)

And we’ve seen it in the farming industry, where government subsidies for corn result in cheap high-fructose corn syrup, which contributes to the epidemic of obesity in our country.

Note: The reason government subsidies result in lower prices for corn and higher prices for houses and education is due to the fact that in the case of corn, the subsidy goes straight to the farmer.  (If you want to see a further analysis of the effects of U.S. agricultural subsidies in a future Cabot Wealth Advisory, let me know.)

Getting back to Professor Shoup, his main suggestion (remember, this was five years ago), is that we implement market-base pricing for parking whenever applicable.  Ideally, these are smart parking meters that communicate with each other regarding current demand and set rates accordingly.

Here in Salem, I sometimes drive downtown after work, and I’m happy to get “free” parking in metered spots after 5:00.  But I know the city would get more revenue—and all interests would be better satisfied—if parking rates were based on real-time demand.

For this week’s issue, I’m going to dip into the mailbag. A few days ago, I received this email from a reader:

“As an employee of Delta Airlines, I would appreciate some comment on Delta’s stock. I think we are poised as ever for a great recovery.”

We’ve been writing about airline stocks a lot recently (I discussed U.S. Airways and Roy Ward discussed Alaska Air and SkyWest), but so far, Delta hasn’t come up. I decided to dig a little deeper and discovered Delta hasn’t been featured in any Cabot newsletters lately.

Delta is currently the world’s largest airline, but if the planned merger of UAL Corp. (parent company of United) and Continental goes through, that airline will become #1.

When I looked further into Delta (DAL), I found that the company reported its biggest quarterly profit in a decade in its the most recent fiscal report, out in July.

Delta reported net income of $467 million, or 55 cents per share, for the second quarter, versus a loss of $257 million, or 31 cents a share, in the year-ago period. And Delta’s overall revenue climbed 17%, to $8.2 billion.

The company also provided a positive forecast, with double-digit revenue gains predicted for the third quarter.

But …

Despite all that good news, Delta’s stock fell on huge volume the day earnings were reported. And fell again two days later on higher than normal volume.

Since then, the stock has stabilized somewhat, but it has been unable to recover to previous highs seen in the spring and early summer.

In fact, the drop surrounding earnings was part of a longer-term downtrend that’s been intact since the market soured earlier this summer.

U.S. Airways (LCC) also dipped with Delta in July, but took off like a rocket after it reported earnings a few days later. The stock has settled down with the market’s recent weakness, but is still rated Hold by Cabot Top Ten Weekly.

Airlines are still a difficult cyclical industry to invest in.

If you’re looking for a real growth-oriented investment in the travel sector, I recommend Home Inns & Hotel Management (HMIN), which is benefiting from the booming China travel market.

The stock has popped up in a number of Cabot’s newsletters, most recently in Cabot Top Ten Weekly where Editor Michael Cintolo wrote:

“This story couldn’t be simpler. Home Inns is the largest hotel chain in China, and it’s growing. In the second quarter, the company opened 36 hotels; to bring its total to 674 hotels in 126 cities in China. The average number of guest rooms per hotel was 116, and the hotels had an average occupancy rate of 96.4% in the quarter, up from 90.5% in the previous quarter. As the economic recovery progressed, management saw the opportunity to raise prices at mature locations, and the result was a knock-your-socks-off after-tax profit margin of 19.6%, far above anything seen in recent years. The company is virtually debt-free (unlike most U.S. hotel chains), and plans to stay that way as it grows, adding a total of roughly 200 hotels in 2010. We like it.

“HMIN came public in late 2006, topped at 50 soon after and then joined the broad market in a slide that ended at 7 in late 2008. Since then, the stock has been on the comeback trail. A week ago, it topped 44, and we think it looks attractive on the current pullback toward the 50-day moving average at 41.”

Click here to learn more about Home Inns and the other leading stocks featured in Cabot Top Ten Weekly.