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When Are Cheap Investments the Best Investments?

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When Are Cheap Investments the Best Investments?

A couple of years ago we wrote to beware of penny stocks. The point being that cheap investments are not necessarily good investments. After all, there is probably a good reason why a stock is selling for a low price. On the other hand, companies that are just starting out and are not being watched by Wall Street analysts may be very promising but no one is watching. The bottom line for stock value (as opposed to price) is intrinsic stock value. When you have unique insights about the stock in question and the big guys are not watching, you can often make very profitable investments in this area. In this regard we got to thinking, when are cheap investments the best investments?

The Largest Valuation Gap in 70 Years
CNBC writes about the current gap between cheap and expensive stocks. This is called the valuation gap and it is historically large. The last time there was such a difference between the high flyers and the lowest echelons of the stock market was when Harry Truman was President, the world was ravaged from World War II, and the Korean War was brewing.

For investors struggling to find opportunities after a stellar rebound in the aging bull market, value stocks might be the best bet.

Case in point: Cheaply priced stocks are getting cheaper as expensive stocks have gotten extremely pricey, pushing the valuation gap to the widest in 70 years, according to AB Bernstein. The record dispersion puts cheap equities in a sweet spot as other pockets of the market start losing the appeal because of their high prices.

What the analyst emphasizes is that the best time for buying value stocks is the point at which valuations have been spread out the most. Many analysts have commented that this must recent upsurge in the stock market is certainly not being driven by value and fundamentals as earnings are getting worse and growth projections in the USA and abroad are not very positive.

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When Are Cheap Investments the Best Investments?

  1. 1. By www.ProfitableInvestingTips.com When Are Cheap Investments the Best Investments?
  2. 2. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments A couple of years ago we wrote to beware of penny stocks.
  3. 3. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The point being that cheap investments are not necessarily good investments.
  4. 4. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments After all, there is probably a good reason why a stock is selling for a low price.
  5. 5. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments On the other hand, companies that are just starting out and are not being watched by Wall Street analysts may be very promising but no one is watching.
  6. 6. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The bottom line for stock value (as opposed to price) is intrinsic stock value.
  7. 7. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments When you have unique insights about the stock in question and the big guys are not watching, you can often make very profitable investments in this area.
  8. 8. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments In this regard we got to thinking, when are cheap investments the best investments?
  9. 9. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The Largest Valuation Gap in 70 Years
  10. 10. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments CNBC writes about the current gap between cheap and expensive stocks.
  11. 11. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments This is called the valuation gap and it is historically large.
  12. 12. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The last time there was such a difference between the high flyers and the lowest echelons of the stock market was when Harry Truman was President, the world was ravaged from World War II, and the Korean War was brewing.
  13. 13. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments For investors struggling to find opportunities after a stellar rebound in the aging bull market, value stocks might be the best bet.
  14. 14. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Case in point: Cheaply priced stocks are getting cheaper as expensive stocks have gotten extremely pricey, pushing the valuation gap to the widest in 70 years, according to AB Bernstein.
  15. 15. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The record dispersion puts cheap equities in a sweet spot as other pockets of the market start losing the appeal because of their high prices.
  16. 16. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments What the analyst emphasizes is that the best time for buying value stocks is the point at which valuations have been spread out the most.
  17. 17. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Many analysts have commented that this must recent upsurge in the stock market is certainly not being driven by value and fundamentals as earnings are getting worse and growth projections in the USA and abroad are not very positive.
  18. 18. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Stock Market Valuation Gap
  19. 19. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments What CNBC says is from a technical perspective as they look at value stocks as a technical factor.
  20. 20. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments It turns out that when valuations surge to extreme levels, the value stocks whose prices have been left behind tend to outperform in the coming six to twelve months.
  21. 21. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Of course, for long term value investors, when fundamental analysis of a stock shows value and the price is low, this becomes a historic buying opportunity.
  22. 22. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Unique Investments in Industry “Disruptors”
  23. 23. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments In this case, we take a look back a couple of years at Trade Desk which was selling for $29 a share after its IPO in September of 2016 and was trading at $49 as recently as May of 2018.
  24. 24. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Since then the stock has taken off and is pushing $200 a share today.
  25. 25. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments When are cheap investments the best investments in cases like Trade Desk?
  26. 26. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments It is when they change how things are done in an industry or even create entirely new sectors.
  27. 27. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments When this happens it often takes insight more so than analysis of fundamentals to get in when the valuation is still cheap.
  28. 28. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments But, companies like Microsoft and Apple were similar stories back in the day and have routinely offered buying opportunities along the way.
  29. 29. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Doing Your Homework on Cheap Investments
  30. 30. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Yahoo Finance looks at cheap stocks as well and suggests 7 cheap stocks with potential for price appreciation.
  31. 31. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments They also offer a note of caution about just looking at the cheap part!
  32. 32. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Stocks under $5 usually aren’t the best stocks. After all, almost every company prices their initial public offering at $10 per share or more.
  33. 33. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Thus, if a stock is trading under $5, that means the stock has most likely been subject to a 50%-plus sell-off, which is a sign that the company is having major trouble.
  34. 34. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments For this reason alone, stocks under $5 should be classified as high-risk stocks by investors.
  35. 35. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments But, some of them should also be classified as high-reward stocks.
  36. 36. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Again, stocks under $5 got there because investors sold them in bunches.
  37. 37. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments That means investor sentiment surrounding these stocks is depressed, and expectations are low.
  38. 38. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments If the company can top those low expectations and sentiment dramatically improves, these same really beaten up stocks can become huge overnight winners.
  39. 39. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments They mention both Snap and Pandora with both doubled in stock price recently.
  40. 40. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The seven that they offer as buying opportunities are these.
  41. 41. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Blue Apron: makes meal kits Pier 1: Struggling but possibly recovering retailer Big 5 Sporting Goods: sells sporting goods Groupon: coupon and savings platform whose demise is not imminent Francesca’s: woman’s clothing retailer up for acquisition Blink: charges electronic vehicles
  42. 42. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The arguments for buying these stocks range from “all of the damage has already been done” to “putting their house in order” to “just wait until the need for their services catches up” which is the case for Blink as more and more electronic vehicles are sold.
  43. 43. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments In each case, investors should be wary and should realize that these stocks are risky propositions.
  44. 44. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments And, in every case, these are not stocks to buy hold and forget about unless you have an investing “death wish!”
  45. 45. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Recognizing the Right Value Story
  46. 46. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments There are times when the stock of a company is falling like a rock and everyone is bailing out, only to discover that the investment makes a huge comeback.
  47. 47. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments One case in point was Sears several years ago. Yes, Sears was the leading retailer, fell behind the times and lost pretty much everything.
  48. 48. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Even today it is in trouble. But, in the early days of its demise the stock made a huge comeback.
  49. 49. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments This was because investors finally realized how much property Sears owned!
  50. 50. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Unencumbered property is generally considered part of a company’s margin of safety.
  51. 51. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments However, in the case of Sears, they were unable to change how they did business, stay ahead of the issue of online sales, and only delayed the inevitable by selling their real estate arm to General Growth in 1995.
  52. 52. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Nevertheless, for anyone who looked past Sears as a cheap and dying stock, recognized them as a real estate investment, and then purchased shares, it was a great investment.
  53. 53. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments However, that factor only lasted while it lasted, making Sears a very good investment for a very short time.
  54. 54. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments Sears Was Briefly a Great Investment
  55. 55. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments When Are Cheap Investments the Best Investments?
  56. 56. http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best- investments The moral to this story is that cheap investments are the best investments when the market is looking elsewhere, when there is overlooked value, and when market enthusiasm drives up valuations into the stratosphere while leaving value stocks behind. Such may be the case today.

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