Let’s flash back over 35 years ago to a brokerage office in Merrillville, Indiana.
There you will find a young Steve Reitmeister doing a summer job for his father. Sure I was trying to earn extra spending money. But, more importantly, I was a budding young capitalist eager to learn about investing in stocks. So who better to learn from than my father, a seasoned Certified Financial Planner?
So dad pulls out the, seemingly 50 pound, hard copy Value Line Investment Survey binder. He reviews the basics with me. Such as, buying stocks is really about taking an ownership stake in the company. And the healthier the company and the more earnings it generates the higher the stock price will go. He then leaves me for a while to do some research on my own.
I was immediately drawn to the valuation section for each stock. In my mind it made no sense to buy a stock that they only expected to go up 30-50% when some had the potential to go up 100, 200 even 300%.
My dad tried to explain to me that quite often they are discounted for a reason. Many of them were troubled companies producing poor earnings results and suffering from declining stock prices. This made them risky investments and perhaps should be avoided.
No matter how hard he tried I could not be swayed. I wanted the chance at the higher potential return. Right then and there, it was clear I was a value investor.
The story since then is one of some glorious successes (buying Amazon at $8.65 and Priceline at $14.62 after the internet bubble burst). But also a story of some shocking failures (watching shares of @Home and CMGI go from bad to non-existent).
So the purpose of this article is to share 3 key lessons learned over these 35+ years with other investors who enjoy the thrill of profiting from great value stocks.
Lesson 1: Why Pursue Value Stocks?
There are many ways to invest successfully. Yet the appeal of value stocks is broad based. That’s because no one will pat you on the back for buying a well-known company like Apple at $100 and selling it for $120.
The joy of the value story is that it’s often a discarded or unknown stock that no one else wants to touch. And when it goes up you get great satisfaction in the “I told you so” moment when you share the story with others (Many of whom didn’t take your advice in the first place. Shame on them 😉
But more importantly, there is great satisfaction in the outsized returns that occurs when you guess right on a previously neglected stock. And that is the best reason of all to actively seek out these value candidates.
More . . .
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Lesson 2: Wait for the Proof
The one thing that all my value stock failures have in common is that I got in too early. Meaning I was buying in on the way down, hoping and praying that a turnaround would take place. Too often that turnaround did not materialize and my hard earned money was washed down the drain.
So the key is to have the patience for the company to show you undeniable proof that an upturn in business performance is occurring. The clearest form of proof is when the company delivers a big positive earnings surprise that Wall Street analysts fawn over with greatly increased earnings estimates for the future.
Yes it’s true that the stock will jump on that news and you will not grab the stock “exactly” at the bottom. However, your entry point will be plenty low in the grand scheme of things. Plus you have now GREATLY increased your odds of being in a winning and timely trade.
Lesson 3: Growth Stocks Can Be Value Stocks Too
You are bound to discover that value stocks exist in every industry with companies big and small. So your choices are abundant. However, the best returns will come from buying the stocks that have the highest growth rates. That is because once the turnaround takes place the PE will start to rise from abnormally low levels. The higher the growth rate of the firm the more the multiple will expand and the greater your final return.
My two previous success stories of Amazon and Priceline prove out my point. These stocks are up 85X and 100X respectively since I bought them fifteen years ago. That’s because they are still experiencing the phenomenal growth associated with being internet ecommerce leaders. However, we all know I would not have fared as well if I invested in more pedestrian stocks like a phone company or bug exterminator.
Long story short…focus on growth stocks for the best value investing profits.
Where to Find the Best Stocks Now?
We are firmly situated in what I call a “melt up” market. We’re seeing sector rotation and consolidation, but on the whole, stocks just don’t want to go down. I expect the market to gain 5 to 10% over the coming year.
But I’ve identified a strategy that I believe will do much better under these conditions. This 4-part strategy, which uses both value and growth metrics as discussed above, has the potential to double or even triple the average market returns.
Would you like to see the picks I’ve made following this strategy? They are actually the same positions I put my own family’s money into and you are welcome to share them through my personal portfolio the Reitmeister Trading Alert.
Normally it is closed to new members but was recently opened again. If you want to learn more, then best do so now because it closes up again at Midnight Sunday, December 4.
Wishing you great financial success,
Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks.com and all of its leading products for individual investors. He is also the Editor of the Reitmeister Trading Alert.