Over the last three months, some investors had the opportunity to take a 25% “dividend” from one of the cheapest stocks on the market. And they will likely take another 25% in the next three months.
Let me explain…
The most basic rule of the stock market is to buy low and sell high. If you buy what’s cheap and sell what’s dear, you will make money.
But that’s not always easy to do.
To do it — to consistently profit in the stock market — you have to be able to go against conventional wisdom. You have to be able to buck the trend, to run free of the herd…
Contrarian investing is another way to put it. To be a contrarian, you have to be skeptical of the big trends in the market. You have to be suspicious of the analysts that tell you Amazon is the greatest retailer of all time.
You have to be downright paranoid that the only reason Goldman Sachs tells you a stock price looks attractive is because they want you to buy so they can take your money.
It usually doesn’t take very long for investors who follow Wall Street advice to realize that yes, they really are out to get you…
Just remember: buy low and sell high. It works for Goldman Sachs, too. What are the odds that when they say you should buy it, they’re trying to sell high?
So, yeah, if you can buy stocks no one is touting, you just might avoid those stocks that remain untainted by the Goldmans of the world.
Hated Stocks Make the Best Gains
You don’t have to go crazy looking for unloved stocks. When I recommended Bank of America (NYSE: BAC) to my Wealth Advisory readers at $9.40 a share, people hated that bank.
They still do. And the recent announcement that Bank of America screwed up its accounting and had to suspend its newly hiked dividend and share buyback for further Fed approval isn’t doing much to help.
When I recommended a Spanish bank, Banco Santander (NYSE: SAN), at $6.40 carrying an 8% dividend, consensus was that the bank would lose more money and have to cancel the dividend. Well, it’s nearly $10 now and still paying that nice divvy…
My point here is not to brag. I want you to know that it pays to do your own research and think outside the Wall Street investment box.
So now, let me tell you about a little research I did the other day. I’m always curious to find out what’s cheap, because what’s cheap is a good indication of what’s hated.
These days, there’s a wide range of opinions as to whether the stock market is cheap or not. The trailing P/E is around 18, which is maybe a point or so on the high side of its historical average…
But that doesn’t sound like a “bubble” valuation for stocks. After all, the P/E for the S&P 500 was 35 in 2000, right before the market crashed.
But where would the current P/E be without the Fed pumping billions into the economy every week? Where would corporate earnings be if interest rates were higher and companies had to pay more to raise funds?
There’s no way to positively know the answer to this. That’s why there’s a big debate over just how reliable earnings and P/E ratios currently are…
Cheap is Safe
Money has been rushing out of expensive stocks. Amazon is down 25% from recent highs. Netflix is down 30%. And each of these companies still trades at more than 13 times book value.
Book value is usually defined as the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated. And right now, investors would literally get pennies on the dollar for Amazon and Netflix.
That’s just insane. But that’s what happens when people fall in love with stocks.
As an income/dividend investor, I like companies that trade closer to book value — closer to what they are actually worth. And if I can find companies trading below book value, all the better. I have a much easier time imagining such a low valuation moving higher in the future.
So I did some digging, and there’s exactly one sector right now that trades below book value: gold stocks.
Yes, these stocks are hated, ignored, completely and utterly shunned. Goldman Sachs will tell you not to buy them. Wall Street says they will probably go lower.
And you know what? I love that. It gets my contrarian instincts piqued. Because it tells me no one wants to own these stocks, even though they trade for less than they are objectively worth.
It might take a little time for investors to come back around to gold stocks, though with the tension in Ukraine, the day that gold looks good again may come sooner than people think.
And besides that, I’ve found a very low-risk way to make steady cash “dividends” from my favorite gold stock.
From a $4.60-a-share entry price, I’ve already taken $1.35 a share in cash. That works out to a 25% special “dividend” from this stock. And I expect I will be able to generate another $1.35 over the next few months from this stock.
There’s nothing like getting paid to wait for a stock to move higher. It lowers your risk and provides cash that can be used for other purposes. To find out more, just click here.
Until next time,
Briton Ryle
@BritonRyle on Twitter
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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.
