Most investors only want to invest when the “markets settle down” or when the “future is clearer.”
Unfortunately, waiting for those times to make an investment often means it’s too late to make any type of significant gain.
This is especially true when it comes to individual companies.
When the headline news is pretty dire, or a company misses its earnings expectations, investors sell first and ask questions later.
That is when you can see a stock lose 10% to 20% and sometimes more of its market value in one day.
The gains that took years to accumulate for stock investors can vanish before lunchtime.
While most investors are running for the hills, smart investors recognize those periods as the best times to invest.
Joe Rosenberg, chief investment strategist at Loews Corp., said, “You can have cheap equity prices or good news, but you can’t have both at the same time.”
The reason is simple: when there is good news, the stock price already reflects it and, in many cases, anticipates even better news.
The case of “too much good news” pushes the stock price even higher and makes it vulnerable to future disappointments due to its high valuation.
The opposite is true as well.
When a company disappoints, investors sell, often causing the stock price to be trading at a significant discount to the worth of the underlying business.
In other words, Mr. Market throws the baby out with the bathwater.
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In my advisory service, Insider Alert, we recently sold Western Digital (WDC) for a gain of +50.9%.
When we recommended WDC to our portfolio in December 2015, the news was not good.
The market for hard drive data storage was facing headwinds. Demand for PCs continued to trend lower, prices for hard disk drives were falling, and the sales at WDC were down.
The company was facing both seasonal and secular trends lower, and customers held back on purchases… not a good position to be in.
WDC’s stock price reflected the doom and gloom. While the news was bad, the stock price was cheap.
But we saw what other investors failed to see because they were blinded by the bad news.
WDC had a strong balance sheet, good management, and was a market leader. In addition, the enterprise side of the business was starting to pick up.
Mr. Market was offering us a great company at an attractive price.
A little more than one year later, WDC, while still a great company, is not as attractive to us at the current price.
We sold the position and just added a semiconductor company that is in the same position WDC was in when we added it: bad news surrounds the stock, but it is trading at an attractive price.
We have a handful of stocks in our portfolio that we would not be surprised to see jump 50% or more in the next few months.
Click here to get the details and also find out about a company that we think has all the potential to be the next Berkshire Hathaway.
All my best, Charles Mizrahi Twitter: @IWPeditor Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street. And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters. Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
