Stocks Worth Purchasing Again
They were good stocks before but they’re even better when they’re cheap.
It’s always enchanting to read stories about average, everyday people who make fortunes by regularly investing small amounts of money over long periods of time in time-tested companies like Caterpillar (NYSE: CAT), Home Depot (NYSE: HD), and McDonald’s.
If you worked in any of these companies and/or regularly “trickled” money into them over the years, this is quite practical — Caterpillar, Home Depot, and McDonald’s have respectively returned 13.6%, 16.1%, and 12.4% annually over the past 20 years.
But you can also get market-beating profits by buying into great companies at more advantageous times — whenever the stock goes on sale. Instead of regularly investing small, fixed amounts, investors can use the simple method of purchasing a stock in portions to handle risk and boost returns. And the current market would definitely count as one of those advantageous times to purchase cheap stocks.
1st, find a solid business
Of course, not every stock will produce such impressive gains, but big returns on investments always come on the backs of profoundly strong businesses. And if you are confident that you have bought shares in a great company, why wouldn’t you consider purchasing again, especially if the stock price is significantly below its intrinsic value? Especially in pessimistic markets (like today’s), profoundly strong businesses can be purchased for good prices — or even downright, outrageously cheap prices.
For a lot of large, stable companies, buying more shares when the outlook is bad has shown to be especially rewarding. For example, buying more British American Tobacco back when investors’ negative attitude over tobacco lawsuits was at its peak would have earned your returns considerably — the stock has returned more than 1,300 percent from its low in 2000.
In a newer example, stock in the wireless technology giant Qualcomm (Nasdaq: QCOM) traded flat for almost two years as major legal conflicts with Nokia (NYSE: NOK) weighed on shares despite the continued, fundamental growth at the firm. Once the conflict was settled in mid-2008, Qualcomm’s stock increased more than 25% in a few days as the pessimism vanished.
For younger, riskier companies, a strategy of owning shares in portions is a smart play. It limits your initial disbursements and reduces your exposure to significant drops, should the company fail or broader economic conditions change.
For instance, look at Mobile Mini. You have likely seen the company’s portable storage units around construction sites and parks — the firm turns shipping containers into storage lockers, and then rents them for use in commercial and residential markets. From 1997 to the start of 2002, Mobile Mini’s stock rose nearly tenfold as the company invest on rising demand for storage units. Then, in a sudden six-month period, the stock dropped roughly 70% of its value.
When demand for portable units decreased with the slowing economy, margins began to get smaller, and investors pulled out of Mobile Mini stock. But the fundamental business operations remained functional. Investors who took advantage of this and poured money into Mobile Mini stock when the outlook was bad are now realizing more than a 180% gain on that added investment. The larger economic conditions had only a temporary effect on Mobile Mini’s solid business model.
Purchase again
Other strong companies, such as j2 Global (Nasdaq: JCOM), Adobe Systems (Nasdaq: ADBE), and Intuitive Surgical (Nasdaq: ISRG), have experienced huge drops in share value at some point, only to come soaring back. Investors who concentrated on the underlying businesses, rather than the stock values, were more likely to turn the circumstance into an opportunity.
The final warning with this method is to make sure that you are not throwing good money at a truly falling company — hence the significance of understanding the underlying business. In their Motley Fool Stock Advisor service, David and Tom Gardner cover all of their investments and rerecommend companies with a promise when the price is right.
VIA MSNBC
Keyword: Stock Investing
