Profiting from Bargain Stocks

Where to find bargains in the market

You only need two things to dull investors’ senses. Low interest rates year after year and rising asset prices.

These two factors won’t just make you lazy. They’ll make you forget what ‘normal’ looks like.

To me, 2018 is far more normal than prior years.

While the All Ordinaries is up a little more than 1%, we’ve seen a dip of almost 5% and a rally of more than 10% from April to August.

What’s abnormal (in the short run) is for stocks to float upwards, like they did from 2012 to 2014 and 2016 to 2017.

Rather than float upwards, stocks generally rise or fall in spurts.

REA Group Ltd [ASX:REA] for example, didn’t do much at all from 2010 to 2012. But from 2013 to 2015, the stock was up more than 200%.

A more exaggerated example is Altium Ltd [ASX:ALU]. The printed circuit board subscription business rose a little over 20% from 2006 to 2012.

Not exactly stellar returns. Either fed up or wanting something more exciting, I suspect many investors might have sold the stock.

But doing so cost them returns of more than 1,800% from 2013 to present.

If you want to make sure you don’t potentially miss out on similar opportunities, keep reading…

How to tell if a stock is a bargain

If you’re going to invest large chucks of your wealth in stocks, please don’t speculate.

There’s nothing wrong with speculation. Investors can earn serious returns betting on a few choice small-caps. However, these returns are far from guaranteed.

It’s why we’ll always tell you to only invest amounts you can afford to lose. That way if you do come across a loser in the small end of town, it’s a loss you can come recover from.

What’s the alternative?

Look for wonderful companies you can understand and that have high potential for reward.

Such a company might be REA Group, owner of realestate.com.au. The company owns the number one residential property site in Australia.

Around 74.6 million home buyers and sellers visit realesate.com.au each month. To give you a sense of how large this network is, competitor Domain Holdings Australia Ltd [ASX:DHG] had about 6.1 million monthly visitors in the 2018 financial year.

Why is this important?

Well, if you’re an agent wanting to sell a house would you rather have your ad seen by 74.6 million people, or 6.1 million people?

No brainer right.

It’s why REA Group can grow earnings year by year. And as long as their network stays strong, earnings will likely continue to grow into the future.

But even a seemingly wonderful business can be a bad investment. This is where price comes into the equation.

Companies like REA and Altium are not worth an unlimited price. And this is the hard part of investing: determining whether you’re buying a bargain or piling into an inflated multiple.

But, thanks to 2018, you’ve seen more than one wonder business go on sale.

Investment expert’s top picks: The three ASX stocks with the biggest potential for 2018. Get your free report now.

Two titans on sale?

Would you say Facebook, Inc. [NASDAQ:FB] is a wonderful company?

What about Tencent Holdings Ltd [HKG:0700]?

I like what both companies bring to the table.

This year, you had an opportunity to buy Facebook when it fell 16% in March. Had you bought the stock at that time, you would have seen a 42% gain in four months.

Then in July, you had another chance to buy Facebook when it dropped 20% within a single day. While the stock hasn’t recovered yet, I suspect time will heal all wounds.

You probably know what troubles Facebook (privacy concerns).

For Tencent, it’s a different can of worms.

In 2017, the stock went on an amazing run. Many investors, I suspect, have been cashing in this year.

Crystallising profit doesn’t explain the whole story however. Tencent, China’s largest online gaming company, has run into a bit of trouble.

Reported by South China Morning Post:

Concerns included reports that the authorities may impose a lofty tax on online video games as part of a tightening of regulations in the gaming industry, while funds are flowing out of Hong Kong at a rapid pace amid a crisis engulfing emerging markets.

On top of that, analysts said investors’ nerves may have been frazzled by an abrupt plunge in the shares of JD.com, a major e-commerce ally in which Tencent holds the largest stake, after the arrest of its CEO on suspicion of rape.

Yet even with regulation, Tencent, like Facebook, is a great company in my books.

They own China’s stickiest app, WeChat. They generate billions from online advertising, streaming, e-commerce and social media (collectively).

These are the kinds of companies you should be using as a platform when researching the market for ideas. So while Tencent — and Facebook — are both down now, investors should, in my view, feel positive about the overall outlook for the future.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: If you want to lay down a little money on the hottest corner of the ASX right now…but you don’t know your way around the small-cap sector…this report is for you. Get access now (free).

Harje Ronngard

Harje Ronngard

Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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