Frustrations and Rewards of Value Investing

Frustrations and Rewards of Value Investing

Buy when cheap, when everyone hates a stock. Not when a stock is expensive and everyone loves it.

If you’ve been following Market Shadows since our Virtual Value Portfolio began in late October, 2012, you may have noticed that Paul Price is building this portfolio according to value investing principles. Not only is this portfolio structured to spread risk between numerous companies, stock selections have been in solid companies trading at the lower levels of their historic P/E ranges. (Currently we have 29 stocks in the portfolio with initial allocations of 3%; four have been increased to 5%.)

While chasing stocks primed to move up quickly is exciting, catching rapid moves higher is a trader’s game. It’s difficult to do consistently, and when the tables turn, the fall can be dramatic. When underlying value is not beneath the share price, there is a much higher degree of risk.

In Market Shadow’s Virtual Value Portfolio, we try to identify stocks that are trading in their lower ranges and we don’t mind waiting for the price to catch up to the value. Even if it seems like a long, boring wait. (To offset a chronic price depression, we might sell a call against a position, but lately we’ve been rather bullish and haven’t been hedging.)

Paul notes, “Watching the overall market go up while your portfolio sits in neutral, or declines, can make you crazy. That’s why momentum investing is so seductive. Something that is already moving appears less likely to sit idly than a currently out-of-favor name.

“Why then, am I addicted to buying value-oriented issues? In the end you’ll generally end up trading less often but capturing bigger moves. The periods of stagnation seem longer than they really are. Simple math works in your favor, too. 

“A stock that has already dropped by 50% only needs to make a partial recovery in order to register a substantial gain.”

In 2012, the DJIA never closed once below the previous year’s December 31 level. Despite that, there were plenty of solid companies offering significant percentage sell-offs. Many companies that had sold off in the beginning of the year rebounded by the year’s end. For example, all the stocks listed in Paul’s table below rebounded from their 2012 lows within seven months. 

Great Entry Points - Quick Rebounds

Paul’s list of depressed stocks which he thinks are poised to recover:

Apple (AAPL), Quest Diagnostics (DGX), Kohl’s (KSS), Express Scripts (ESRX) and Coach (COH).

KSS, ESRX and COH are in our Virtual Value Portfolio.

DGX, KSS and ESRX are in our Put Selling Virtual Portfolio

Ironically, or not so ironically, when the stocks in the list above were at their lows, they were despised by most analysts. Paul’s advice, “Don’t let bargain prices scare you away from going against the crowd.”

Paul’s disclosure: Long CAT, DE, HP, IGT, KELYA, ORCL, SLB, WDR, WAG, ESRX, DGX, COH, KSS.


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