Is that it?
Stocks had a terrible October, but now everything will rally until the end of the year?
It’s what market research firm Fundstrat seems to think. From the Australian Financial Review:
‘US equities are oversold and investors should position for a year-end rally of at least 10 per cent, according to Fundstrat Global Advisors.
‘…Stocks were “massively oversold” based on the “unusually low” percentage of shares in the S&P 500 and the Russell 2000 still trading above both their 50 and 200 day moving averages, Fundstrat’s Thomas Lee said, ahead of today’s rally.’
I just don’t understand why the declines stopped…hardly anything has changed.
Trump could still impose more tariffs on China. The US Federal Reserve continues to suck money out of the system. Debt across the globe is higher.
The only difference is prices.
Stock prices have come down a bit. But I wouldn’t call everything and anything a bargain.
Recent market declines make for long-term opportunities
One of the biggest gainers on the Dow recently has been credit card company Visa Inc. [NYSE:V].
Investors added almost US$20 billion to Visa’s market cap. But for what reason?
Visa does look like an obvious bargain trading at more than 30-times earnings. Investors had a chance to bid up the stock on 24 October when Visa announced earnings had risen almost 30%.
Yet instead, people only waded back into the water when they saw others doing the same.
It’s clear to me that A LOT of investors have no idea what they’re doing. They either don’t want to miss out on a rally or don’t want to be around when things fall. And they’ll change their reasons to buy or sell to suit whatever their emotions tell them.
I wouldn’t be surprised if you see more declines ahead. Any quick small decline might spook the herd to turn and run…again.
For the rational people out there, this is great news. Recent market declines have made long-term opportunities possible. More declines could create obvious bargains!
One such bargain (if it continues to decline) might be Facebook, Inc. [NASDAQ:FB].
The social network has risen momentarily. On 30 October, Facebook showed investors their third quarter results.
Sales, operating earnings and profits were all up…but not as much as investors would have liked.
Despite Facebook’s growth, analysts are nervous about what lies ahead. Analysts at Nomura, Raymond James, JMP Securities and Pivotal Research all cut their price targets for the tech giant.
Pivotal Research was the only one to target a price that is lower than what Facebook currently trades for (US$151.70 at time of writing). So while it might be worth a look, Facebook to me at least still doesn’t seem like an obvious buy.
Maybe if the stock drops to US$110 a share…yet I think something really wrong has to happen before you see that.
So we’re back to the age old investing questions, what should you buy?
What stocks should you buy?
Research studies tell us to buy the unloved, the undesirable. Buy the stocks that make your stomach churn, stocks most investors wouldn’t touch.
The reason why is because investors over-exaggerate good and bad news, while also having a fuzzy picture of the future.
Valuation professor at Columbia business school, Brue Greenwald likes to say when investors think they’re 100% right, they’re really only 60% right.
And because of this confidence basis, they bid up glamour stocks and oversell the dogs.
But had you bought some of these dogs in 2008–09 (property related stocks) you would have cleaned up BIG TIME. US property prices collapsed. Everyone was selling everything that had anything to do with property.
And as a result, bargains were out in the open for the taking.
Or what about in the early 2000s, when tech stocks crashed? Would you have bought companies like Amazon.com, Inc. [NASDAQ:AMZN]?
If you did, you’d have picked up a 20-bagger gain, which continues to grow.
Now, I’m not saying you should buy stocks making no money at all that are on their way out. But if you jump into areas where no one else wants to go, low prices will do wonders for your portfolio.
Some of the most hated stocks in the market right now include Reject Shop Ltd [ASX:TRS].
The company is struggling to grow sales. Management believes 2019 will be a year of change, updating their growth strategy and trying to roll out more stores.
Yet because current earnings are down and it’s not obvious management can turn the situation around, the stock trades for less than four-times earnings.
For the income investors out there, Reject Shop also pays a dividend yield of 15%.
No promises that Reject Shop will rocket in 2019. But it’s definitely worth your time to look into.
Another beaten down stock is billion-dollar chip maker, Micron Technology, Inc. [NASDAQ:MU]. They sell about 57% of their chips to China. While sales and earnings are higher than ever before, trade tensions are encouraging investors to stay away.
Wall Street believes tariffs on chips sent to China will inevitably bring Micron’s sales and earnings lower. And I would have to agree.
But what if this all just blows over? What if the US and China sort out their differences and come to an agreement?
All that really has to happen for trade tensions to not get any worse.
If things just get a little better, then investors might re-rate Micron’s share price. Micron currently trades for just 3.5-times earnings.
Both Reject Shop and Micron have baggage, everyone can see that. It’s why their stocks are so cheap.
And it’s because of their prices that they could both be massive opportunities as we head into 2019. The best part is, if we see more declines, even more stocks like Reject Shop and Micron will drop into the ‘you need to look at this stock’ category.
While I’m not optimistic for the market this year, I think it could be one of the best times to set you up for future gains.
Your thrifty friend,
Editor, Money Morning
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