Which Stocks are Cheap?

Written By Briton Ryle

Posted August 26, 2015

I’d like to share the note I sent to my Wealth Advisory subscribers on Monday. If you recall, the Dow Industrials was down over 1,000 points early Monday.

I know it’s only been a couple days, and since those Monday lows, stocks have rallied, sold off, rallied, sold off, and appear to be trying to rally again…

If you bought any stock in the last month or two, you’re probably looking at your screen and thinking, “Not again.”

I know I am. I took a couple small positions on Friday, and they are both down today. And I found myself thinking, “I should’ve known better.”

Of course, that was simply the emotion of looking at a loss talking. We humans have a tendency to always think we should have known better when something bad happens, that we could have predicted and prevented a bad outcome.

But that’s just not true. And this market correction isn’t any different. Various talking heads and prognosticators have been calling for a correction for years. If you tried to sell every time you heard a bearish prediction… well, suffice it to say, you probably shouldn’t be investing if every negative comment rattles you.

If you read your monthly issue of The Wealth Advisory, you know I’ve gotten a bit bearish lately. But I haven’t sold a single share of stock since this correction started. And I hope you haven’t, either.

In fact, I bought a little J.C. Penney (NYSE: JCP). And I think you should buy a little of something today, too…

It’s a funny thing: Investors always say they want to buy low and sell high. But when we actually get the chance to buy low, we are sometimes too scared to pull the trigger. What if it goes lower?

There aren’t any guarantees. But once the coast is clear and it’s pretty obvious that the selling is done, stock prices will be a lot higher than they are right now.

I know this won’t be a popular opinion, but I think you should buy a little something today. Apple hit a low of $92 and has bounced back above $100. Facebook hit $72, and it’s back over $80. Starbucks, Bank of America — you’ll find some bargains in The Wealth Advisory portfolio, too.

Again, I can’t say for sure stocks will be higher tomorrow or the next day. But if you let the opportunity to buy at a big discount slip by, you might be looking at your screen in a week or two and thinking, “Not again.”

Just Doing My Job

My job is to help individual investors navigate the stock market and make good decisions about when and in what they should invest their hard-earned money.

That’s how I see it, at least. And I take it seriously.

On the other hand, I don’t always take the stock market seriously. At least that’s true for the day-to-day moves. You don’t need any more evidence than the last few sessions that daily stock market moves can be all sound and fury, signifying nothing.

I mean, look at Monday. Down over 1,000 points, the Dow rallies 800 points, then reverses to finish down nearly 600. Then yesterday, it’s up 400 on Chinese rate cuts, reverses again, and finishes 200 points lower in the biggest bearish reversal since the depths of the financial crisis. And then today, it opens another ~350 to the upside…

What the hell is anyone supposed to glean from action like that?

My point is: Monday’s reversal from that 1,000-point decline looked really bullish until it fell apart in a matter of hours. Then it looked really bearish. Same thing yesterday, and maybe the same thing today.

Imagine if you were trying to trade those swings. Buy, sell, buy, sell — it could literally drive you insane (and cost you a lot of loot, too).

As I see it, Monday was a very extreme move. That’s something you act on. The weird reversals following that extreme move are mostly insignificant. They are the result of the bulls and bears fighting it out, trying to figure out what it all means. And since it doesn’t mean very much, no progress gets made in terms of stock prices or index levels. We’re basically still in the middle of Monday’s extreme range.

Ironically, the fact that we are in still in the middle of Monday’s extreme range actually does mean something…

Consolidation

It seems to me stocks are trying to stabilize — like when you drop a ball and the bounces and drops get smaller and smaller.

Is that a buy signal? Not exactly. But it’s also not a sell signal. It means investors don’t want to make any strong commitments to the upside or downside.

So, here’s the thing: As I wrote to my Wealth Advisory subscribers on Monday, once the coast is clear and it’s pretty obvious that the selling is done, stock prices will be a lot higher than they are right now.

Take a look at some Chinese solar stocks. Both Jinko Solar (NYSE: JKS) and Trina Solar (NYSE: TSL) are being valued at roughly one quarter’s worth of revenue.

Yeah, you read that right. In its latest quarterly report, Trina did $722 million in revenue, and it has a market cap of $708 million. And it was profitable at $0.42 a share last quarter.

Jinko is in the same boat. It reported $516 million in revenue last quarter, and its market cap is $570 million.

Just like Monday’s 1,000-point drop, these are extreme valuations. I can’t account for them in any way, except to say that maybe it’s the fear of Chinese stocks. Fact is, I share that fear, because there’s no real accountability for Chinese companies if they mislead foreign investors.

That said, I make an exception for Chinese solar. I’m bullish on solar in general, and these Chinese companies sell to SolarCity and other installation companies. So check them out — they are good stocks to own while the market gets its act together.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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