When Are Cheap Investments the Best Investments?

By www.ProfitableInvestingTips.com
When Are Cheap Investments the
Best Investments?

http://profitableinvestingtips.com/penny-stocks/when-are-cheap-investments-the-best-
investments
A couple of years ago we wrote
to beware of penny stocks.

investments
The point being that cheap
investments are not necessarily good
investments.

investments
After all, there is probably a good
reason why a stock is selling for a low
price.

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.

investments
The bottom line for stock value (as
opposed to price) is intrinsic stock
value.

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.

investments
In this regard we got to thinking, when
are cheap investments the best
investments?

investments
The Largest Valuation Gap in
70 Years

investments
CNBC writes about the current gap
between cheap and expensive
stocks.

investments
This is called the valuation gap and it
is historically large.

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.

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

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.

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.

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.

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.

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Stock Market Valuation Gap

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What CNBC says is from a technical
perspective as they look at value
stocks as a technical factor.

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.

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.

investments
Unique Investments in
Industry “Disruptors”

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.

investments
Since then the stock has taken off and
is pushing $200 a share today.

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When are cheap investments the best
investments in cases like Trade Desk?

investments
It is when they change how things are
done in an industry or even create
entirely new sectors.

investments
When this happens it often takes
insight more so than analysis of
fundamentals to get in when the
valuation is still cheap.

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But, companies like Microsoft and
Apple were similar stories back in the
day and have routinely offered buying
opportunities along the way.

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Doing Your Homework on
Cheap Investments

investments
Yahoo Finance looks at cheap stocks
as well and suggests 7 cheap
stocks with potential for price
appreciation.

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They also offer a note of caution about
just looking at the cheap part!

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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.

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.

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For this reason alone, stocks under $5
should be classified as high-risk
stocks by investors.

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But, some of them should also be
classified as high-reward stocks.

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Again, stocks under $5 got there
because investors sold them in
bunches.

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That means investor sentiment
surrounding these stocks is
depressed, and expectations are low.

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If the company can top those low
expectations and sentiment
dramatically improves, these same
really beaten up stocks can become
huge overnight winners.

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They mention both Snap and Pandora
with both doubled in stock price
recently.

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The seven that they offer as buying
opportunities are these.

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

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.

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In each case, investors should be
wary and should realize that these
stocks are risky propositions.

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And, in every case, these are not
stocks to buy hold and forget about
unless you have an investing “death
wish!”

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Recognizing the Right Value
Story

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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.

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One case in point was Sears several
years ago. Yes, Sears was the leading
retailer, fell behind the times and lost
pretty much everything.

investments
Even today it is in trouble. But, in the
early days of its demise the stock
made a huge comeback.

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This was because investors finally
realized how much property Sears
owned!

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Unencumbered property is generally
considered part of a company’s
margin of safety.

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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.

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.

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However, that factor only lasted while
it lasted, making Sears a very good
investment for a very short time.

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Sears Was Briefly a Great Investment

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When Are Cheap
Investments the Best
Investments?

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.

When Are Cheap Investments the Best Investments?

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When Are Cheap Investments the Best Investments?