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Thank you for accessing this Technival Vx Fundamental Analysis page.
What is most interesting about this is the tendency for forecasters to rely solely on either fundamental or technical analysis. Many are merely following the conventional wisdom that each technique is logically more compatible with a given trading horizon. Because long-run movements in a market are ultimately steered by the underlying fundamentals, fundamental analysis is considered more suitable for long-term investors. Conversely, since short-term market movements are dominated by volatile price adjustments, technical analysis is the method of choice for most short-term traders.
Regardless of the reasoning, forecasting models that fail to incorporate both approaches will suffer predictable lapses in forecasting accuracy. The reason? A model based on only one type of indicator is all too easily bamboozled by the market conditions not being modeled. This happens because an indicator can see only the market behavior that it is specifically designed to see. A model using only fundamental indicators is incapable of adjusting to the constant flux of technical market conditions, whereas the strict use of technical analysis ignores the powerful influence of the underlying fundamentals on market prices.
Technical and fundamental analysis should not be treated as incompatible approaches to market forecasting. Instead, they should be considered complementary methods, each with a strong dependence upon the other. The interdependent nature of the two is so remarkable that asking either approach to stand alone in providing a market forecast is asking more than perhaps either method can deliver individually.
The payoff from using both technical and fundamental indicators is an enlightened glimpse inside overall market action that otherwise would remain unobservable. A trader using a combined model can compare and contrast the fundamentals, which dictate what it should be doing, with technical conditions, which represent what the market is doing. Instead of using fundamental indicators blind to the influence of technical conditions, and vice versa, you can identify occasions when technical and fundamental factors are pushing a market in either the same or opposing directions. This makes it possible to exploit the most reliable trading conditions that occur when the underlying fundamentals are in agreement with the current technical stance of the market. Without explicitly modeling both, the best you can hope for is that the unaccounted-for factor does not assume control of the market at an inopportune time.
COMBINING INDICATORS
Building a combined forecasting model is easy to demonstrate. The only ingredients needed are reliable technical and fundamental indicators and a method by which to combine them. It is the method of combining them that deserves special attention, because battle-tested fundamental and technical indicators are already widely available.
The average buyside analyst spends endless hours poring over balance sheets and income statements in much the same way that traders and technical analysts spend untold hours reviewing charts. Many technicians are quick to dismiss fundamental data as already taken into account in price, while some fundamental analysts will scoff at the work of technicians as voodoo. I would be the last to suggest we set aside our beloved charts in favor of spreadsheets, but results could be improved by incorporating a basic level of fundamental analysis into charting and trading.
WHY COMBINE THE TWO?
Some compelling arguments can be made for this approach:
1. I would take issue with the belief that the market is efficient, and all available information has been incorporated into the price at any given moment. Perception is everything. Misperceptions make for inefficiencies, and inefficiencies make for good trades.
2. Even if you accept the premise that all data has already been factored in the price, you still need to deal with how it got there. The market does not instantly adjust to improving or deteriorating fundamentals. That takes time, and meanwhile you are better off trading with the movement than against it.
Value Investing
Value Stocks Flat Outperform The S&P
Those are fighting words — but here's proof.
Say your Great-Aunt Mabel had a spare $1,000 in 1927. If she'd invested it in the S&P, she'd have $1.8 million by now... not too shabby. But if she'd invested it in VALUE stocks, she'd have $8.6 million.
Value Investors:
* Find great companies on sale
* Limit risk by insisting on a margin of safety
* Exploit inefficient market behavior
* Take the long view
* Go against the grain
Benjamin Graham formulated the basic structure of value investing in the 1920s and 1930s. His disciples include Charlie Munger, Mario Gabelli, Bill Miller, and Warren Buffett.
And me. I'm Pal Anand, advisor of our latest newsletter/subscription service, Economic Summary/Active Model Positions, where we take the time-tested strategy of these master investors and turn theory into practice. That means profits for you.
They're the hares. We're the tortoises.
Wall Street can't handle genuine value investing. More than 95% of institutional managers try to beat the S&P 500 on a quarterly basis.
Poor bunnies! In Economic Summary/Active Model Positions, I guide you through a strategy that favors individual investors. (What else did you expect from theRootofAllGoddisMoney.com?)
WE are on a whole different time scale. We avoid significant friction costs. We aren't pressured to make constant, snap decisions. And we want all the information possible before taking action.
Great values are always out there
Unfortunately, we never hear stocks announced as Blue Light Specials.
The Anatomy of a Home Run
In 1962, 44-year-old year-old Sam Walton opened a store in sleepy Rogers, Arkansas. That same year, rivals Kmart, Woolco, and Target also set up shop. Retail would never be the same.
All four companies do well. Two become life-changing investments — making shareholders wealthy beyond their wildest dreams and standing tall among the greatest stock stories ever told.
One is the quintessential Hidden Gem. It features...
Driven yet conservative management
Founders with significant personal stakes
Generous free cash flows
Dominant positioning in a profitable niche
It even pays a dividend. Perhaps you guessed it. Sam Walton's general store in Arkansas was Wal-Mart. Over the next three decades, this quintessential Hidden Gem would make men and women millionaires many times over.
The Small-Cap Risk Myth
Wal-Mart was never risky — even when it was worth just $28 million. Sam Walton knew his business. He had a huge stake in its success. Wal-Mart was nimble — its leadership fascinated by new technologies for retailers.
But America hadn't heard of it. And Wall Street's prestigious firms laughed at Sam Walton from Arkansas when he visited their big-shot New York offices.
It turns out, well-run small companies like Wal-Mart are not inherently risky. That's the best-kept secret on Wall Street.
Had you invested just $1,000 in Walton's budding empire as recently as 1970 and bought on a dip in the direction of the long-term up-trend and sold when the inevitable short-term counter-trend move comes along or hedged with individual stock options or stock options on DIA, IJS, IJT, IWM, MDY, OEF, QQQ or SPY, you'd be sitting on $50 million today.
What might surprise you is that a few smart investors did precisely that (not the ETF options ofcourse as they are just recent), and it changed their lives. That, dear reader, is Active Model Positions investing — finding, then buying on a dip and selling at the top and re-buying on a dip in the direction of the long-term trend, the next Wal-Mart.
I watch the DIA, IJS, IJT, IWM, MDY, OEF, QQQ and SPY, daily. The nasdaq is a reflection of technology stocks as a whole, the russell 2000 of smaller company stocks as a whole and the Dow of large companies that we’ve all heard of such as GM and General Electric. I also follow certain sector related indexes such as the price of oil, gold and the ten-year treasury rate ($tnx), retail indices and others. Sector index charts such as these come into play when we look at a particular ETF.
Determining market direction is such an important first step before buying a stock using a swing trading/rolling stock strategy. I can’t stress it enough. If the market is downtrending, we want to exit all our long positions, but if it is uptrending on a long-term trend change or continuing on a dip from a long-term trend change, we can enter/re-enter and if you can do it a couple of times a month, you can make huge profits over a year’s time!
Some investors like to study charts a lot and some don’t. If you would like a synopsis of market activity on a periodic basis without as much effort or you just want to confirm your own analysis of current market direction, you can subscribe to our Economic Summary/Active Model Positions subscription service.
As investors, the wind is really at our back. The price of stocks is based off of earnings growth more than anything else. When you buy a company, you’re really buying a piece of those future earnings and growth.
Corporations are all attempting to increase their profits by growing revenues and reducing expenses. Over the last century, US corporations have grown earnings at about an 7-8% average annual rate. In the past couple years it has been much higher than that. This is what really drives stock prices in the long run. And as long as companies continue to grow profits, stocks should continue to go up. So chances are more likely that stock prices will go up in the future than go down based on past history. That’s why I’m always confident that another at least short-term rally is right around the corner just waiting to produce lots of profits for us swing traders! Until the next rally starts, just be very selective on which stocks (the best fundamentals and the best chart) you trade using the methods I have learned.
Finding Quality Stocks Poised for a Short-term Rally
I’m about to share with you the second secret of this powerful swing-trading technique. Finding the right stock to buy at the right time. This section is all about building our list of stocks to watch closely.
One of the reasons that many investors never venture into rolling stocks or swing trading is because it generally calls for buying much smaller stocks with little in the way of fundamental value. To make any rolling stock technique work, you need to find stocks that trade in a range or ‘channel’ that is wide enough to make a decent profit when the stock bounces off support and heads to its resistance level. Most of these stocks are small companies with little in the way of profits and revenue. They are very speculative companies which is why the price tends to vary so much. Small stocks with poor fundamentals tend to fail when times get tough. Its just a fact of life. So there’s some risk in being in the wrong place at the wrong time.
However, many of these smaller companies are producing terrific results if only for the short-term. Profits are exceeding expectations, revenue growth is better than they first thought and analysts are upgrading the stock. To find these gems I use my computer to find stocks that have yielded an average of over 33% per year over the past 17 years! This ranking is primarily based on how well the company exceeds earnings forecasts and how much the future earnings estimates have been revised upward. It also takes into account how consistent the revisions have been across the various analysts and how reliable each analyst is based on his/her past performance. Stocks are continuously being added and deleted from the list as more analyst and company statements are released. Stocks often go on the list and then off it again in a span of a few months.
The unbelievable 33%/year track record is based on monthly portfolio rebalancing.
So these stocks outperform only in the short-term. Perfect for a trader who only holds the stock for generally a few weeks or less! What’s even more impressive is that this list of #1 ranked stocks has outperformed the broader S&P in each of the last 17 years except 1 with 1 losing year! You can’t beat those odds when buying small company stocks. As you can see, we’re already ahead of the game by picking stocks from this pool.
What Economic Summary/Active Model Positions Can Do for You
Each day, I use my powerful computer to evaluate around 8,000-plus stocks (100%) to arrive at a computer filtered list (0.5%) of value stocks and then re-evaluate this filtered list of value stocks again using my computer to arrive at a handfull (less than 0.125%) and then manually evaluate this handfull using my mental neural-net — all to recommend just a tiny few (0.0125% - 0.125%) to my Active Model Positions subscribers. Why all the work? Because at least 99.5% of what's out there is overpriced or far too speculative for your portfolio. But...
Here's the Good News
Among that remaining 0.5% are a tiny few (less than 0.125%) of stellar value opportunities. The best of these will rise 100 times in value — or more — over the next 10-15 years. But, again, they may not be named Merck or IBM or GE — companies that are already valued in the tens of billions. It doesn't matter, because, I trade the moves, not the markets.
That's why I focus exclusively on businesses with obsessive founders and insiders who own 15% of the company or more. Companies which are undervalued, beat-up but which are relatively hot, safe without huge debt concerns, generating excess cash flow from operations, making money now with future money making potential and other proprietary fundamental factors.
I Do the Work for You
Do you absolutely love to dig into the financials, press releases, and SEC filings? Or maybe not? Well, I'm here to do the work for you if you don't — and with you if you do. For every gem I recommend, I thoroughly evaluate:
The company's products
The business and competitive landscape
The leadership team
And that's just for starters. I also listen to the CEO of every company I recommend. I track every recommendation at www.collective2.com/go/money, which you can follow in live online.
You can sit back and watch — or dive in and share your thoughts with other smart investors online at collective2 forum. Best of all, you can begin right now with a 14 day free trial.
Start by scanning the open positions. You can buy a few of my current recommendations and get started, without investing a ton of money. Our members are investing anywhere from $100 per month to $1 million per year.
Making Your Fortune With Value investing.
Times are changing. Even ivory-tower academics admit that the stock market's pricing is inefficient, that certain stocks do beat the market, and that superior investors do find them. I'm not surprised.
On the Shoulders of Giants
Have you heard of Peter Lynch? More than 1 million have read his classic One Up on Wall Street. What I learned from Lynch influences the stocks I recommend to my subscribers to this day. I gladly admit it.
I've learned from Seth Klarman, as well. And from Jean Marie Eveillard, Charles Royce, and masters like Thornton Oglove and Jeremy Siegel. I look forward to passing the lessons of these legends on to you while helping you smash the market's average returns.
As founder and chairman of theRootofAlllGoodisMoney.com, my mission is to help you buy the very best stocks AND to help you become a better investor along the way. That same dual mission drives Economic Summary/Active Model Positions.
We can't isolate value investments to a particular sector or industry or market cap limit. Though it's easy to see great value investments in retrospect (think Home Depot at $20), I do serious, down-and-dirty digging to discover today's investments with value potential.
You don't have to get your hands dirty
I confess — I have a passion for scanning the thousands of publicly-traded stocks and vetting the numbers of the potential value candidates. But I won't recommend a stock unless I see some catalyst or business reason why the share price will eventually reach my estimation of intrinsic value.
I hunt down undervalued companies the way others hunt 12-point bucks — but my quarry is always in season. Finding the best VALUE opportunities for you each and every day gives me enormous satisfaction.
And since I do the heavy lifting, you don't have to.
"Value investing has increased my own net worth dramatically; I believe that it can do the same for you. I'm confident that this system will increase your circle of competence — and decrease your stress.
"I served as a senior business consultant for a number of companies, from Vizag, India, to San Jose, New York, Cincinnati, Detroit, Chicago, US, Matamoros, Mexico to Toronto, Canada. Specializing in start-ups and turnarounds, I learned lessons that influence my investing practices still.
"I purchased my first stock share in 1988. I developed a love of investment research on the Community discussion boards and honed my focus on value investing as a participant and then a leader in many of the online discussion boards. Like many value investors, mine is a passion for the process of finding the ideal stock, not simply making the pick and reaping the rewards."
"We just don't see a lot of opportunities that look attractive to us right now."
I know you've heard that one. It's the mantra of grumpy value investors everywhere. If legendary investor Warren Buffett insists that doing nothing is sometimes the most important thing an investor can do, who are we to argue?
But, with all due respect to Mr. Buffett, doing nothing has never been a big part of what I do. I'm a value investor. My quest -- and my commitment to each and every member of my Economic Summary/Active Model Positions newsletter/subscription service -- is to dig up great value investments. Try it for a 14 days, on me.
But in This Market?
Absolutely.
By traditional measures, stocks aren't cheap. And there's some real junk out there. But there's always a bargain or two available, even during the worst markets. It's just that sometimes they're harder to find.
Value is out there, even when whole groups of stocks get ahead of themselves. But don't take my word for it. I'll show you how to find undervalued companies, even in this dicey market. Even better, we'll take a look at some great value plays you can buy today.
Value investing works, especially in rocky markets. Empirical data from the revered Ibbotson Associates supports a growing body of academic work that shows that value stocks outperform growth stocks and the broader market. That's if you can find them.
Seeing the Entire Field
Vision is fundamental to investors. Whether your model is Warren Buffett, Peter Lynch, Bill Miller, or Benjamin Graham, the father of value investing himself, you'll never spot great value stocks if you're not actively looking. That seems like an obvious statement, but many investors are content to wait for ideas to fall into their laps. By the time a truly superior investment idea trickles down to those investors, the easy (i.e., safest) money has already been made.
Making the Value Case
To begin, let's define our terms. Value investing is simply buying a stock or any other asset for less than its intrinsic value. To which I'd add: with a built-in margin of safety. Both are loaded statements and imply a lot, including that:
1. Stocks have intrinsic values.
2. We can calculate these values.
3. Stocks trade at prices other than these intrinsic values.
The world's most successful investors -- the legends I mentioned already, plus John Neff, David Dreman, Charles Brandes, among countless others -- have adhered to strict value-investing principles for generations. That's enough for me. The million-dollar question is where to look for value now? It's too early to say if Economic Summary/Active Model Positions has any million-dollar answers -- but it won't cost you a dime to try it out for a 2 weeks.
Value investing is a big field. Let's break it down into five primary zones.
1. Industry Stalwarts
In capital markets, as in life, things simply fall out of fashion. That's not to say that there's never a good reason -- there often is. But in the midst of a downward spiral, shares of legitimate contenders can slump below the intrinsic value of their businesses -- sometimes far below and for meaningful periods.
For evidence, look at the major drug companies (jargon alert: big pharma). Big pharma, so long regarded as bulletproof, has fallen on hard times. The culprit: competition from specialty drug and biotech outfits, combined with a dearth of blockbusters and the threat of low-cost generic drugs. All are very real concerns, but this too shall pass.
I'm keeping close tabs on the cream of the crop -- such household names as Pfizer (NYSE: PFE), beleaguered Bristol-Myers Squibb (NYSE: BMY), and especially Schering-Plough (NYSE: SGP), a major player that is small enough to benefit handsomely from a single blockbuster drug.
If Schering-Plough isn't a screaming bargain by traditional measures just now, that blockbuster may not be far off. Vytorin, a new combination treatment with Merck's (NYSE: MRK) Zocor for high cholesterol, has clear advantages over existing drugs. The release dovetails nicely with recent warnings of the dangers of leaving high cholesterol untreated. Analysts are looking for $3.4 billion in sales by 2008. Some argue that Vytorin can replace Pfizer's $9 billion blockbuster Lipitor as the industry standard.
The point is, when they've fallen from favor, the risk-reward tradeoff (and the risk-adjusted returns) associated with stalwarts such as Schering-Plough gets mighty favorable. This one may go lower yet, but long-term investors are buying a value-investing must: a built-in margin of safety.
Any big game hunter will tell you that it's a lot easier to track and capture a bull elephant if the elephant is already wounded. Just like our industry stalwarts, it's best to bag 'em when they're down before they bounce back to full health.
Value-Investing Secret: Bag the wounded elephant.
2. The Cyclicals
Closely related to the industry stalwarts are the cyclicals. These are businesses tied closely to the old-economy business cycle and whose stocks tend to fall in and out of favor with surprising consistency. Think raw materials and natural resource companies, chemicals and other industrial inputs, automobiles, and, more recently, semiconductor and semi-equipment makers.
More than with the industry stalwarts, buying the cyclicals requires equal parts art and science. It frankly helps to have a working knowledge of the industry, to which you might add a knack for spotting macroeconomic trends. (While we're being frank, this a great benefit of my setup at Economic Summary/Active Model Positions. The constant interaction and shared experiences of our subscribers online mean plenty of additional expertise on tap. Take a free 2 weeks to see how it works.)
When shopping among the cyclicals, stick to industry leaders with rock-solid management and cash-heavy balance sheets. It's notoriously difficult to forecast the U.S. and global economies with any degree of precision. Strong balance sheets help companies stay afloat if a downturn persists longer than expected.
I almost always have the Big 3 automakers on my long-term watch list. Right now, I'm also watching the chip stocks. It may surprise some, given that the group was at the vanguard of the last growth and tech revolutions, that the semiconductor industry is deeply cyclical.
Last year, Intel (Nasdaq: INTC) made a tremendous move off a cyclical bottom. It's pulled back a bit lately. I would watch it from here, along with leading chip equipment maker Applied Materials (Nasdaq: AMAT). I might be a buyer on further weakness.
Value-Investing Secret: Learn the business cycles and buy cyclicals when they're down.
3. Former Story Stocks
Growth investors are enamored with the story stock, building it up so that momentum players can propel it to the stratosphere. Value investors on board before the story breaks are big winners. Value investors on the sidelines do well to let the bandwagon roll by. It's a familiar tale.
Don't think for a moment, however, that story stocks cannot be values.
Just last year, I salivated over Home Depot (NYSE: HD). Fifteen years before, the Atlanta, Ga.-based home-improvement retailer was the poster child for the Peter Lynch 10-bagger -- a stock poised to rise 10 times in value. Stores popped up everywhere. Housing was heating up. Growth and momentum investor radars flashed.
A story stock was born, and gradually the value train left the station.
Fast-forward to January 2003. Home Depot was a household name. The stock had run from the single digits in January 1990 to more than $60 a decade later.
Then the bottom fell out.
Suddenly, everybody thought Lowe's (NYSE: LOW) was going to eat Home Depot's lunch. By January 2003, you could take Home Depot home for about $20.
At $20, Home Depot stood out like one of its big orange signs. I wasn't alone in spotting its solid balance sheet and sound expansion plans. In early 2003, the story was a hot topic among value investors. The more we discussed it, the more convinced we became that here was a value play with a huge margin of safety.
Were there problems? Sure, but this was no Kmart (Nasdaq: KMRT) or Enron. And by early 2003, the company was already on its way back. Expectations were reeled in. Management compressed the cash conversion cycle (primarily by turning over inventory more quickly and getting suppliers to pay up on time). Most importantly, cash flow rebounded.
Is today's Home Depot a $60 mansion? Maybe not. But a $20 fixer-upper? I'd call that a bargain. Better yet, I'd call that a margin of safety. At around $35, Home Depot is much nearer its sweet spot today, but it's a great case study. Take a look at more recent candidates during your free 14-day trial of Economic Summary/Active Model Positions.
Value-Investing Secret: Don't rule out story stocks. Buy old stories with a margin of safety.
4. Fallen Angels
As hard and far as Home Depot fell, some have it worse. I'm talking about companies that hit serious snags, even those accused of fraud, targeted by SEC investigators, or plagued by dodgy management. It's an ugly crowd, to be sure.
Conglomerate Tyco and specialty drug company Elan are great picks that panned out for patient value investors after the herd jumped ship. Enron is one that sank like a rock. The key, of course, is telling the difference -- before the rebound or the Chapter 11 filing. For starters, demand a change in management, an improving balance sheet, and strong free cash flow.
You likely heard something of the brutal 2003 suffered by everybody's second favorite mortgage reseller Freddie Mac (NYSE: FRE). First, the company was forced to restate prior years' earnings (upwards, of all things). Then, in June, when full-year 2003 results were finally announced, investors fixated on a 50% decline in profits and a caution that earnings would be more volatile going forward. (Makes sense, I guess, given that the company's woes began when regulators accused management of spending too much time and energy managing earnings.)
I'll admit that this business of packaging loans for sale to investors is a tough nut to crack. Moreover, conservative investors might balk at the complexity of Freddie's derivatives operations. Even so, the asset base feels solid and federal regulators -- who, believe me, are watching like hawks -- appear pleased with Freddie's interest-rate exposure.
Meanwhile, following a management shakeup, and with Richard Syron as the new chairman and CEO, Freddie is essentially gutting and rebuilding its accounting systems. The company more than met its minimum capital requirement recently raised by federal regulators, and despite the shortfall earned nearly $5 billion in 2003.
The situation bears watching and I'm not dismissing these problems out of hand. Still, the new management seems to be on track. Bottom line: It's hard not to like Freddie Mac at less than eight times trailing earnings and just over one times sales.
Value-Investing Secret: Down does not always mean out.
5. Bankruptcy Survivors
Then there are the down and out. And out again -- out of bankruptcy, that is.
Chapter 11 is almost always hell going in, but every so often it's heaven coming out. It stands to reason that these guys would be undervalued. After all, investors were just recently burned when the company filed for bankruptcy protection. Here again, the emotions of fickle investors can provide opportunity for patient value investors.
Great-performing, cash-producing assets are the key to any post-Chapter 11 success. Also, look for new management with a proven track record. Remember, when emerging, companies often have a competitive advantage simply by virtue of having had their debt loads lightened.
Over the years, debt-laden airlines and the occasional big-ticket disaster like Kmart -- which, come to think of it, was a bit of a bargain when it emerged -- have been prime examples. But more than any other group, companies emerging from bankruptcy must be approached case by case.
Alderwoods Group (Nasdaq: AWGI) is a leading U.S.provider of funeral services. The company emerged from bankruptcy in January 2002 under highly experienced new management and has established itself as the clear best-practices provider in the industry.
In less than two years, the turnaround management team has paid down more than $200 million in debt. Sales growth is accelerating, as are cash flows. At around $9, the stock has more than doubled in a little over a year, but it sure looks attractive on a recent pullback from $14 and change.
Find more examples during your 14-day free trial of Economic Summary/Active Model Positions.
Value-Investing Secret: Don't overlook the phoenix.
Our Big Advantage
I started with a quote -- somewhat tongue in cheek -- about how value guys are always claiming there's nothing attractive out there.
But there is a lesson in there I don't want you to overlook: In value investing, patience is key.
Let the growth and momentum guys chase the market.
We can pick our spots.
Mutual and pension fund managers must be able to move huge sums of money into and out of the market. Even if they could buy small- and mid-cap stocks, it typically wouldn't be worth their while given the amount of money they have to put to work.
That's one reason Peter Lynch has always maintained that individual investors have a real advantage over professional fund jocks.
Don't argue with Peter Lynch.
And don't pass up your free 2 weeks of Economic Summary/Active Model Positions.
Value-Investing Secret: Stay nimble and opportunistic.
There You Have It
We can argue all day about the economy and whether stocks as a group are over- or undervalued. In fact, during your free trial of Economic Summary/Active Model Positions, you can pretty much count on it.
But we're not looking to buy the market, just specific stocks -- value stocks.
You could fish the entire vast ocean of the U.S. stock market. Fishing for value, I suggest that you break it up into more manageable pools:
1. Industry Stalwarts
2. Cyclicals
3. Former Story Stocks
4. Fallen Angels
5. Bankruptcy Survivors
In almost any market, at least one of these pools is jumping.
But by all means be selective.
Start with the stocks highlighted in this report.
Take an especially close look at:
1. Schering-Plough (NYSE: SGP), an industry stalwart with a twist
2. Freddie Mac (NYSE: FRE), a leader reeling from bad news
3. Alderwoods (Nasdaq: AWGI), a great value executing a brilliant turnaround this side of bankruptcy.
A word of caution: Even with value stocks, there are no sure things. Follow the stories and diversify to limit your risk. If researching stocks sounds daunting or time-consuming, it needn't be. And you don't have to go it alone.
At Economic Summary/Active Model Positions, I pick apart balance sheets and cash flow statements in search of red flags -- especially when accrual earnings don't jibe with actual cash flows. I also insist on quality management. Most importantly, having determined a stock's intrinsic value, I won't recommend it unless the current price offers a comfortable margin of safety.
Apply these rules and it becomes clear why, over the long haul, value stocks are a must in every portfolio. Or better still, join us at Economic Summary/Active Model Positions. Your first 2 weeks are on me.
What is most interesting about this is the tendency for forecasters to rely solely on either fundamental or technical analysis. Many are merely following the conventional wisdom that each technique is logically more compatible with a given trading horizon. Because long-run movements in a market are ultimately steered by the underlying fundamentals, fundamental analysis is considered more suitable for long-term investors. Conversely, since short-term market movements are dominated by volatile price adjustments, technical analysis is the method of choice for most short-term traders.
Regardless of the reasoning, forecasting models that fail to incorporate both approaches will suffer predictable lapses in forecasting accuracy. The reason? A model based on only one type of indicator is all too easily bamboozled by the market conditions not being modeled. This happens because an indicator can see only the market behavior that it is specifically designed to see. A model using only fundamental indicators is incapable of adjusting to the constant flux of technical market conditions, whereas the strict use of technical analysis ignores the powerful influence of the underlying fundamentals on market prices.
Technical and fundamental analysis should not be treated as incompatible approaches to market forecasting. Instead, they should be considered complementary methods, each with a strong dependence upon the other. The interdependent nature of the two is so remarkable that asking either approach to stand alone in providing a market forecast is asking more than perhaps either method can deliver individually.
The payoff from using both technical and fundamental indicators is an enlightened glimpse inside overall market action that otherwise would remain unobservable. A trader using a combined model can compare and contrast the fundamentals, which dictate what it should be doing, with technical conditions, which represent what the market is doing. Instead of using fundamental indicators blind to the influence of technical conditions, and vice versa, you can identify occasions when technical and fundamental factors are pushing a market in either the same or opposing directions. This makes it possible to exploit the most reliable trading conditions that occur when the underlying fundamentals are in agreement with the current technical stance of the market. Without explicitly modeling both, the best you can hope for is that the unaccounted-for factor does not assume control of the market at an inopportune time.
COMBINING INDICATORS
Building a combined forecasting model is easy to demonstrate. The only ingredients needed are reliable technical and fundamental indicators and a method by which to combine them. It is the method of combining them that deserves special attention, because battle-tested fundamental and technical indicators are already widely available.
The average buyside analyst spends endless hours poring over balance sheets and income statements in much the same way that traders and technical analysts spend untold hours reviewing charts. Many technicians are quick to dismiss fundamental data as already taken into account in price, while some fundamental analysts will scoff at the work of technicians as voodoo. I would be the last to suggest we set aside our beloved charts in favor of spreadsheets, but results could be improved by incorporating a basic level of fundamental analysis into charting and trading.
WHY COMBINE THE TWO?
Some compelling arguments can be made for this approach:
1. I would take issue with the belief that the market is efficient, and all available information has been incorporated into the price at any given moment. Perception is everything. Misperceptions make for inefficiencies, and inefficiencies make for good trades.
2. Even if you accept the premise that all data has already been factored in the price, you still need to deal with how it got there. The market does not instantly adjust to improving or deteriorating fundamentals. That takes time, and meanwhile you are better off trading with the movement than against it.
Value Investing
Value Stocks Flat Outperform The S&P
Those are fighting words — but here's proof.
Say your Great-Aunt Mabel had a spare $1,000 in 1927. If she'd invested it in the S&P, she'd have $1.8 million by now... not too shabby. But if she'd invested it in VALUE stocks, she'd have $8.6 million.
Value Investors:
* Find great companies on sale
* Limit risk by insisting on a margin of safety
* Exploit inefficient market behavior
* Take the long view
* Go against the grain
Benjamin Graham formulated the basic structure of value investing in the 1920s and 1930s. His disciples include Charlie Munger, Mario Gabelli, Bill Miller, and Warren Buffett.
And me. I'm Pal Anand, advisor of our latest newsletter/subscription service, Economic Summary/Active Model Positions, where we take the time-tested strategy of these master investors and turn theory into practice. That means profits for you.
They're the hares. We're the tortoises.
Wall Street can't handle genuine value investing. More than 95% of institutional managers try to beat the S&P 500 on a quarterly basis.
Poor bunnies! In Economic Summary/Active Model Positions, I guide you through a strategy that favors individual investors. (What else did you expect from theRootofAllGoddisMoney.com?)
WE are on a whole different time scale. We avoid significant friction costs. We aren't pressured to make constant, snap decisions. And we want all the information possible before taking action.
Great values are always out there
Unfortunately, we never hear stocks announced as Blue Light Specials.
The Anatomy of a Home Run
In 1962, 44-year-old year-old Sam Walton opened a store in sleepy Rogers, Arkansas. That same year, rivals Kmart, Woolco, and Target also set up shop. Retail would never be the same.
All four companies do well. Two become life-changing investments — making shareholders wealthy beyond their wildest dreams and standing tall among the greatest stock stories ever told.
One is the quintessential Hidden Gem. It features...
Driven yet conservative management
Founders with significant personal stakes
Generous free cash flows
Dominant positioning in a profitable niche
It even pays a dividend. Perhaps you guessed it. Sam Walton's general store in Arkansas was Wal-Mart. Over the next three decades, this quintessential Hidden Gem would make men and women millionaires many times over.
The Small-Cap Risk Myth
Wal-Mart was never risky — even when it was worth just $28 million. Sam Walton knew his business. He had a huge stake in its success. Wal-Mart was nimble — its leadership fascinated by new technologies for retailers.
But America hadn't heard of it. And Wall Street's prestigious firms laughed at Sam Walton from Arkansas when he visited their big-shot New York offices.
It turns out, well-run small companies like Wal-Mart are not inherently risky. That's the best-kept secret on Wall Street.
Had you invested just $1,000 in Walton's budding empire as recently as 1970 and bought on a dip in the direction of the long-term up-trend and sold when the inevitable short-term counter-trend move comes along or hedged with individual stock options or stock options on DIA, IJS, IJT, IWM, MDY, OEF, QQQ or SPY, you'd be sitting on $50 million today.
What might surprise you is that a few smart investors did precisely that (not the ETF options ofcourse as they are just recent), and it changed their lives. That, dear reader, is Active Model Positions investing — finding, then buying on a dip and selling at the top and re-buying on a dip in the direction of the long-term trend, the next Wal-Mart.
I watch the DIA, IJS, IJT, IWM, MDY, OEF, QQQ and SPY, daily. The nasdaq is a reflection of technology stocks as a whole, the russell 2000 of smaller company stocks as a whole and the Dow of large companies that we’ve all heard of such as GM and General Electric. I also follow certain sector related indexes such as the price of oil, gold and the ten-year treasury rate ($tnx), retail indices and others. Sector index charts such as these come into play when we look at a particular ETF.
Determining market direction is such an important first step before buying a stock using a swing trading/rolling stock strategy. I can’t stress it enough. If the market is downtrending, we want to exit all our long positions, but if it is uptrending on a long-term trend change or continuing on a dip from a long-term trend change, we can enter/re-enter and if you can do it a couple of times a month, you can make huge profits over a year’s time!
Some investors like to study charts a lot and some don’t. If you would like a synopsis of market activity on a periodic basis without as much effort or you just want to confirm your own analysis of current market direction, you can subscribe to our Economic Summary/Active Model Positions subscription service.
As investors, the wind is really at our back. The price of stocks is based off of earnings growth more than anything else. When you buy a company, you’re really buying a piece of those future earnings and growth.
Corporations are all attempting to increase their profits by growing revenues and reducing expenses. Over the last century, US corporations have grown earnings at about an 7-8% average annual rate. In the past couple years it has been much higher than that. This is what really drives stock prices in the long run. And as long as companies continue to grow profits, stocks should continue to go up. So chances are more likely that stock prices will go up in the future than go down based on past history. That’s why I’m always confident that another at least short-term rally is right around the corner just waiting to produce lots of profits for us swing traders! Until the next rally starts, just be very selective on which stocks (the best fundamentals and the best chart) you trade using the methods I have learned.
Finding Quality Stocks Poised for a Short-term Rally
I’m about to share with you the second secret of this powerful swing-trading technique. Finding the right stock to buy at the right time. This section is all about building our list of stocks to watch closely.
One of the reasons that many investors never venture into rolling stocks or swing trading is because it generally calls for buying much smaller stocks with little in the way of fundamental value. To make any rolling stock technique work, you need to find stocks that trade in a range or ‘channel’ that is wide enough to make a decent profit when the stock bounces off support and heads to its resistance level. Most of these stocks are small companies with little in the way of profits and revenue. They are very speculative companies which is why the price tends to vary so much. Small stocks with poor fundamentals tend to fail when times get tough. Its just a fact of life. So there’s some risk in being in the wrong place at the wrong time.
However, many of these smaller companies are producing terrific results if only for the short-term. Profits are exceeding expectations, revenue growth is better than they first thought and analysts are upgrading the stock. To find these gems I use my computer to find stocks that have yielded an average of over 33% per year over the past 17 years! This ranking is primarily based on how well the company exceeds earnings forecasts and how much the future earnings estimates have been revised upward. It also takes into account how consistent the revisions have been across the various analysts and how reliable each analyst is based on his/her past performance. Stocks are continuously being added and deleted from the list as more analyst and company statements are released. Stocks often go on the list and then off it again in a span of a few months.
The unbelievable 33%/year track record is based on monthly portfolio rebalancing.
So these stocks outperform only in the short-term. Perfect for a trader who only holds the stock for generally a few weeks or less! What’s even more impressive is that this list of #1 ranked stocks has outperformed the broader S&P in each of the last 17 years except 1 with 1 losing year! You can’t beat those odds when buying small company stocks. As you can see, we’re already ahead of the game by picking stocks from this pool.
What Economic Summary/Active Model Positions Can Do for You
Each day, I use my powerful computer to evaluate around 8,000-plus stocks (100%) to arrive at a computer filtered list (0.5%) of value stocks and then re-evaluate this filtered list of value stocks again using my computer to arrive at a handfull (less than 0.125%) and then manually evaluate this handfull using my mental neural-net — all to recommend just a tiny few (0.0125% - 0.125%) to my Active Model Positions subscribers. Why all the work? Because at least 99.5% of what's out there is overpriced or far too speculative for your portfolio. But...
Here's the Good News
Among that remaining 0.5% are a tiny few (less than 0.125%) of stellar value opportunities. The best of these will rise 100 times in value — or more — over the next 10-15 years. But, again, they may not be named Merck or IBM or GE — companies that are already valued in the tens of billions. It doesn't matter, because, I trade the moves, not the markets.
That's why I focus exclusively on businesses with obsessive founders and insiders who own 15% of the company or more. Companies which are undervalued, beat-up but which are relatively hot, safe without huge debt concerns, generating excess cash flow from operations, making money now with future money making potential and other proprietary fundamental factors.
I Do the Work for You
Do you absolutely love to dig into the financials, press releases, and SEC filings? Or maybe not? Well, I'm here to do the work for you if you don't — and with you if you do. For every gem I recommend, I thoroughly evaluate:
The company's products
The business and competitive landscape
The leadership team
And that's just for starters. I also listen to the CEO of every company I recommend. I track every recommendation at www.collective2.com/go/money, which you can follow in live online.
You can sit back and watch — or dive in and share your thoughts with other smart investors online at collective2 forum. Best of all, you can begin right now with a 14 day free trial.
Start by scanning the open positions. You can buy a few of my current recommendations and get started, without investing a ton of money. Our members are investing anywhere from $100 per month to $1 million per year.
Making Your Fortune With Value investing.
Times are changing. Even ivory-tower academics admit that the stock market's pricing is inefficient, that certain stocks do beat the market, and that superior investors do find them. I'm not surprised.
On the Shoulders of Giants
Have you heard of Peter Lynch? More than 1 million have read his classic One Up on Wall Street. What I learned from Lynch influences the stocks I recommend to my subscribers to this day. I gladly admit it.
I've learned from Seth Klarman, as well. And from Jean Marie Eveillard, Charles Royce, and masters like Thornton Oglove and Jeremy Siegel. I look forward to passing the lessons of these legends on to you while helping you smash the market's average returns.
As founder and chairman of theRootofAlllGoodisMoney.com, my mission is to help you buy the very best stocks AND to help you become a better investor along the way. That same dual mission drives Economic Summary/Active Model Positions.
We can't isolate value investments to a particular sector or industry or market cap limit. Though it's easy to see great value investments in retrospect (think Home Depot at $20), I do serious, down-and-dirty digging to discover today's investments with value potential.
You don't have to get your hands dirty
I confess — I have a passion for scanning the thousands of publicly-traded stocks and vetting the numbers of the potential value candidates. But I won't recommend a stock unless I see some catalyst or business reason why the share price will eventually reach my estimation of intrinsic value.
I hunt down undervalued companies the way others hunt 12-point bucks — but my quarry is always in season. Finding the best VALUE opportunities for you each and every day gives me enormous satisfaction.
And since I do the heavy lifting, you don't have to.
"Value investing has increased my own net worth dramatically; I believe that it can do the same for you. I'm confident that this system will increase your circle of competence — and decrease your stress.
"I served as a senior business consultant for a number of companies, from Vizag, India, to San Jose, New York, Cincinnati, Detroit, Chicago, US, Matamoros, Mexico to Toronto, Canada. Specializing in start-ups and turnarounds, I learned lessons that influence my investing practices still.
"I purchased my first stock share in 1988. I developed a love of investment research on the Community discussion boards and honed my focus on value investing as a participant and then a leader in many of the online discussion boards. Like many value investors, mine is a passion for the process of finding the ideal stock, not simply making the pick and reaping the rewards."
"We just don't see a lot of opportunities that look attractive to us right now."
I know you've heard that one. It's the mantra of grumpy value investors everywhere. If legendary investor Warren Buffett insists that doing nothing is sometimes the most important thing an investor can do, who are we to argue?
But, with all due respect to Mr. Buffett, doing nothing has never been a big part of what I do. I'm a value investor. My quest -- and my commitment to each and every member of my Economic Summary/Active Model Positions newsletter/subscription service -- is to dig up great value investments. Try it for a 14 days, on me.
But in This Market?
Absolutely.
By traditional measures, stocks aren't cheap. And there's some real junk out there. But there's always a bargain or two available, even during the worst markets. It's just that sometimes they're harder to find.
Value is out there, even when whole groups of stocks get ahead of themselves. But don't take my word for it. I'll show you how to find undervalued companies, even in this dicey market. Even better, we'll take a look at some great value plays you can buy today.
Value investing works, especially in rocky markets. Empirical data from the revered Ibbotson Associates supports a growing body of academic work that shows that value stocks outperform growth stocks and the broader market. That's if you can find them.
Seeing the Entire Field
Vision is fundamental to investors. Whether your model is Warren Buffett, Peter Lynch, Bill Miller, or Benjamin Graham, the father of value investing himself, you'll never spot great value stocks if you're not actively looking. That seems like an obvious statement, but many investors are content to wait for ideas to fall into their laps. By the time a truly superior investment idea trickles down to those investors, the easy (i.e., safest) money has already been made.
Making the Value Case
To begin, let's define our terms. Value investing is simply buying a stock or any other asset for less than its intrinsic value. To which I'd add: with a built-in margin of safety. Both are loaded statements and imply a lot, including that:
1. Stocks have intrinsic values.
2. We can calculate these values.
3. Stocks trade at prices other than these intrinsic values.
The world's most successful investors -- the legends I mentioned already, plus John Neff, David Dreman, Charles Brandes, among countless others -- have adhered to strict value-investing principles for generations. That's enough for me. The million-dollar question is where to look for value now? It's too early to say if Economic Summary/Active Model Positions has any million-dollar answers -- but it won't cost you a dime to try it out for a 2 weeks.
Value investing is a big field. Let's break it down into five primary zones.
1. Industry Stalwarts
In capital markets, as in life, things simply fall out of fashion. That's not to say that there's never a good reason -- there often is. But in the midst of a downward spiral, shares of legitimate contenders can slump below the intrinsic value of their businesses -- sometimes far below and for meaningful periods.
For evidence, look at the major drug companies (jargon alert: big pharma). Big pharma, so long regarded as bulletproof, has fallen on hard times. The culprit: competition from specialty drug and biotech outfits, combined with a dearth of blockbusters and the threat of low-cost generic drugs. All are very real concerns, but this too shall pass.
I'm keeping close tabs on the cream of the crop -- such household names as Pfizer (NYSE: PFE), beleaguered Bristol-Myers Squibb (NYSE: BMY), and especially Schering-Plough (NYSE: SGP), a major player that is small enough to benefit handsomely from a single blockbuster drug.
If Schering-Plough isn't a screaming bargain by traditional measures just now, that blockbuster may not be far off. Vytorin, a new combination treatment with Merck's (NYSE: MRK) Zocor for high cholesterol, has clear advantages over existing drugs. The release dovetails nicely with recent warnings of the dangers of leaving high cholesterol untreated. Analysts are looking for $3.4 billion in sales by 2008. Some argue that Vytorin can replace Pfizer's $9 billion blockbuster Lipitor as the industry standard.
The point is, when they've fallen from favor, the risk-reward tradeoff (and the risk-adjusted returns) associated with stalwarts such as Schering-Plough gets mighty favorable. This one may go lower yet, but long-term investors are buying a value-investing must: a built-in margin of safety.
Any big game hunter will tell you that it's a lot easier to track and capture a bull elephant if the elephant is already wounded. Just like our industry stalwarts, it's best to bag 'em when they're down before they bounce back to full health.
Value-Investing Secret: Bag the wounded elephant.
2. The Cyclicals
Closely related to the industry stalwarts are the cyclicals. These are businesses tied closely to the old-economy business cycle and whose stocks tend to fall in and out of favor with surprising consistency. Think raw materials and natural resource companies, chemicals and other industrial inputs, automobiles, and, more recently, semiconductor and semi-equipment makers.
More than with the industry stalwarts, buying the cyclicals requires equal parts art and science. It frankly helps to have a working knowledge of the industry, to which you might add a knack for spotting macroeconomic trends. (While we're being frank, this a great benefit of my setup at Economic Summary/Active Model Positions. The constant interaction and shared experiences of our subscribers online mean plenty of additional expertise on tap. Take a free 2 weeks to see how it works.)
When shopping among the cyclicals, stick to industry leaders with rock-solid management and cash-heavy balance sheets. It's notoriously difficult to forecast the U.S. and global economies with any degree of precision. Strong balance sheets help companies stay afloat if a downturn persists longer than expected.
I almost always have the Big 3 automakers on my long-term watch list. Right now, I'm also watching the chip stocks. It may surprise some, given that the group was at the vanguard of the last growth and tech revolutions, that the semiconductor industry is deeply cyclical.
Last year, Intel (Nasdaq: INTC) made a tremendous move off a cyclical bottom. It's pulled back a bit lately. I would watch it from here, along with leading chip equipment maker Applied Materials (Nasdaq: AMAT). I might be a buyer on further weakness.
Value-Investing Secret: Learn the business cycles and buy cyclicals when they're down.
3. Former Story Stocks
Growth investors are enamored with the story stock, building it up so that momentum players can propel it to the stratosphere. Value investors on board before the story breaks are big winners. Value investors on the sidelines do well to let the bandwagon roll by. It's a familiar tale.
Don't think for a moment, however, that story stocks cannot be values.
Just last year, I salivated over Home Depot (NYSE: HD). Fifteen years before, the Atlanta, Ga.-based home-improvement retailer was the poster child for the Peter Lynch 10-bagger -- a stock poised to rise 10 times in value. Stores popped up everywhere. Housing was heating up. Growth and momentum investor radars flashed.
A story stock was born, and gradually the value train left the station.
Fast-forward to January 2003. Home Depot was a household name. The stock had run from the single digits in January 1990 to more than $60 a decade later.
Then the bottom fell out.
Suddenly, everybody thought Lowe's (NYSE: LOW) was going to eat Home Depot's lunch. By January 2003, you could take Home Depot home for about $20.
At $20, Home Depot stood out like one of its big orange signs. I wasn't alone in spotting its solid balance sheet and sound expansion plans. In early 2003, the story was a hot topic among value investors. The more we discussed it, the more convinced we became that here was a value play with a huge margin of safety.
Were there problems? Sure, but this was no Kmart (Nasdaq: KMRT) or Enron. And by early 2003, the company was already on its way back. Expectations were reeled in. Management compressed the cash conversion cycle (primarily by turning over inventory more quickly and getting suppliers to pay up on time). Most importantly, cash flow rebounded.
Is today's Home Depot a $60 mansion? Maybe not. But a $20 fixer-upper? I'd call that a bargain. Better yet, I'd call that a margin of safety. At around $35, Home Depot is much nearer its sweet spot today, but it's a great case study. Take a look at more recent candidates during your free 14-day trial of Economic Summary/Active Model Positions.
Value-Investing Secret: Don't rule out story stocks. Buy old stories with a margin of safety.
4. Fallen Angels
As hard and far as Home Depot fell, some have it worse. I'm talking about companies that hit serious snags, even those accused of fraud, targeted by SEC investigators, or plagued by dodgy management. It's an ugly crowd, to be sure.
Conglomerate Tyco and specialty drug company Elan are great picks that panned out for patient value investors after the herd jumped ship. Enron is one that sank like a rock. The key, of course, is telling the difference -- before the rebound or the Chapter 11 filing. For starters, demand a change in management, an improving balance sheet, and strong free cash flow.
You likely heard something of the brutal 2003 suffered by everybody's second favorite mortgage reseller Freddie Mac (NYSE: FRE). First, the company was forced to restate prior years' earnings (upwards, of all things). Then, in June, when full-year 2003 results were finally announced, investors fixated on a 50% decline in profits and a caution that earnings would be more volatile going forward. (Makes sense, I guess, given that the company's woes began when regulators accused management of spending too much time and energy managing earnings.)
I'll admit that this business of packaging loans for sale to investors is a tough nut to crack. Moreover, conservative investors might balk at the complexity of Freddie's derivatives operations. Even so, the asset base feels solid and federal regulators -- who, believe me, are watching like hawks -- appear pleased with Freddie's interest-rate exposure.
Meanwhile, following a management shakeup, and with Richard Syron as the new chairman and CEO, Freddie is essentially gutting and rebuilding its accounting systems. The company more than met its minimum capital requirement recently raised by federal regulators, and despite the shortfall earned nearly $5 billion in 2003.
The situation bears watching and I'm not dismissing these problems out of hand. Still, the new management seems to be on track. Bottom line: It's hard not to like Freddie Mac at less than eight times trailing earnings and just over one times sales.
Value-Investing Secret: Down does not always mean out.
5. Bankruptcy Survivors
Then there are the down and out. And out again -- out of bankruptcy, that is.
Chapter 11 is almost always hell going in, but every so often it's heaven coming out. It stands to reason that these guys would be undervalued. After all, investors were just recently burned when the company filed for bankruptcy protection. Here again, the emotions of fickle investors can provide opportunity for patient value investors.
Great-performing, cash-producing assets are the key to any post-Chapter 11 success. Also, look for new management with a proven track record. Remember, when emerging, companies often have a competitive advantage simply by virtue of having had their debt loads lightened.
Over the years, debt-laden airlines and the occasional big-ticket disaster like Kmart -- which, come to think of it, was a bit of a bargain when it emerged -- have been prime examples. But more than any other group, companies emerging from bankruptcy must be approached case by case.
Alderwoods Group (Nasdaq: AWGI) is a leading U.S.provider of funeral services. The company emerged from bankruptcy in January 2002 under highly experienced new management and has established itself as the clear best-practices provider in the industry.
In less than two years, the turnaround management team has paid down more than $200 million in debt. Sales growth is accelerating, as are cash flows. At around $9, the stock has more than doubled in a little over a year, but it sure looks attractive on a recent pullback from $14 and change.
Find more examples during your 14-day free trial of Economic Summary/Active Model Positions.
Value-Investing Secret: Don't overlook the phoenix.
Our Big Advantage
I started with a quote -- somewhat tongue in cheek -- about how value guys are always claiming there's nothing attractive out there.
But there is a lesson in there I don't want you to overlook: In value investing, patience is key.
Let the growth and momentum guys chase the market.
We can pick our spots.
Mutual and pension fund managers must be able to move huge sums of money into and out of the market. Even if they could buy small- and mid-cap stocks, it typically wouldn't be worth their while given the amount of money they have to put to work.
That's one reason Peter Lynch has always maintained that individual investors have a real advantage over professional fund jocks.
Don't argue with Peter Lynch.
And don't pass up your free 2 weeks of Economic Summary/Active Model Positions.
Value-Investing Secret: Stay nimble and opportunistic.
There You Have It
We can argue all day about the economy and whether stocks as a group are over- or undervalued. In fact, during your free trial of Economic Summary/Active Model Positions, you can pretty much count on it.
But we're not looking to buy the market, just specific stocks -- value stocks.
You could fish the entire vast ocean of the U.S. stock market. Fishing for value, I suggest that you break it up into more manageable pools:
1. Industry Stalwarts
2. Cyclicals
3. Former Story Stocks
4. Fallen Angels
5. Bankruptcy Survivors
In almost any market, at least one of these pools is jumping.
But by all means be selective.
Start with the stocks highlighted in this report.
Take an especially close look at:
1. Schering-Plough (NYSE: SGP), an industry stalwart with a twist
2. Freddie Mac (NYSE: FRE), a leader reeling from bad news
3. Alderwoods (Nasdaq: AWGI), a great value executing a brilliant turnaround this side of bankruptcy.
A word of caution: Even with value stocks, there are no sure things. Follow the stories and diversify to limit your risk. If researching stocks sounds daunting or time-consuming, it needn't be. And you don't have to go it alone.
At Economic Summary/Active Model Positions, I pick apart balance sheets and cash flow statements in search of red flags -- especially when accrual earnings don't jibe with actual cash flows. I also insist on quality management. Most importantly, having determined a stock's intrinsic value, I won't recommend it unless the current price offers a comfortable margin of safety.
Apply these rules and it becomes clear why, over the long haul, value stocks are a must in every portfolio. Or better still, join us at Economic Summary/Active Model Positions. Your first 2 weeks are on me.