There are two fundamental strategies to stock selection – growth and value. With growth you try to find the stocks in companies that are expanding and will continue to do so for many years. You profit when the company grows and their share price increases along with the growth. Eventually they’ll also pay a dividend that will increase in value each year, providing income maybe ten to twenty years down the road.
The second type of investing, value investing, involves picking stocks that are beaten down in value, and therefore are cheap compared to where they should be in price. Generally the best thing to do is to find industries that are out-of-favor and select stocks within that industry, rather than buying individual stocks that are having issues. If a whole industry is declining, good and bad stocks will all decline in price. When the industry recovers, so will most of the stocks within that industry. In fact, the companies that emerge will do better than they were doing during the last boom time since the weaker companies will have vanished, leaving market share for the survivors to grab up.
If an individual stock is falling because of issues at the company, however, there may be systematic issues with the company. Many of these companies will take years to recover, and may disappear entirely. One example in my portfolio where this happened was with Pacific Sunwear, which I had bought at $20 per share, then again at $2 per share once the price had dropped, thinking that they were cheap enough to be worth taking the risk and waiting for a recovery. In that case they over-expanded and the taste for their products turned. Since that point the whole company has filed for bankruptcy. The company had systematic issues that didn’t disappear with a turn in the economy.
Right now an interesting place to be from a value investing standpoint is energy. I held a few oil and gas companies just when the energy market peaked about a year ago, leading to some big losses. I mistakenly decided that I wanted a hedge against inflation and energy seem like a good inflation hedge, so I bought in, right near the top. The price of oil then dropped through the floor, taking many of my investments down 80% or more.
I sold many of the companies I had purchased, such as Oasis Petroleum and Ensco PLC, since I didn’t see them coming back for a long time. Others, however, like Greenbriar and Cameco, still seemed like good places to be as a long-term investment. Greenbriar makes rail cars and was doing well during the oil boom because of all the oil that is shipped by rail. They also have business beyond oil, however, so they should do well in any booming economy where a lot of things are being shipped. I therefore bought more shares after the fall and plan to sit on them for several years, waiting for the recovery.
Cameco is the world’s largest uranium producer. They were hurt both by low oil prices and by the Japanese nuclear accident. Nuclear power, however, is the only currently viable energy source that doesn’t produce carbon dioxide, and with many countries imposing carbon taxes and other measures to reduce CO2 production, nuclear may become much more popular. I therefore bought more shares of Cameco after the fall.
These are not short-term position. It takes time for industries to recover. Over long periods of time, however, mixing in a few value positions with growth positions can pay off well. We’ll see what happens for me with these two positions.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.