The Unknown
Many "cheap" stocks are cheap simply because they are virtually unknown. Oftentimes, these are stocks with no analyst coverage. Without that support, nobody with a broad platform is out there to sing the praises of the company. Likewise (and contrary to what investors may believe and what institutional investors and their ad agencies will say), professionals do not necessarily spend their days looking for undiscovered gems and buried treasure.
In fact, many institutions will not even consider investing in a company without a minimum number of analysts covering the stock. Without that institutional support, it can be difficult to produce the necessary buying pressure to move a stock upward.
Unknown stocks can be a godsend for patient value investors; there are often numerous excellent companies out there trading at great prices. On the flip side, it can take a very long time for that value to come to light and it can be a severe trial of an investor's patience. Moreover, some of these stocks also fall into the "unbuyable" bucket, and that can make the wait even longer. (For additional information, take a look at Find Hidden Stock Gems That Analysts Ignore.)
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4 comments:
When you shop, you always look for substitutes of something, affordable, inexpensive. Buying stocks is not for average shoppers, Buying stocks is time consuming (researches of companies, arithmetic), you need do the homework, a lot of homework. Buying mutual fund for retirement, it is good bet.
@ chenyx75 -
You are right - buying stocks takes a lot of work. But the time is worth it for me.
I'm not against mutual funds, but I just happen to think I can beat most of them. I do own one mutual fund, though - the Dodge & Cox Income Fund.
Y, it is a sad tale but sometimes a stock is cheap for a good reason. The story I read about Warren Buffet's trademark Berkshire Hathaway was that for a long time the company was an apparel maker - I am old enough to remember the ads for BH shirts. Buffet originally bought it because it was trading at a big discount to book value. I think his quote about it went something like most of that book value was erased in the time it took to move their obsolete machinery to the dump. As Buffet learned and keeps repeating, it all comes down to the underlying business.
As for mutual funds, I own some but I usually buy them only when the broader markets are down. Whatever one thinks of Jim Cramer, he makes a good point about funds; when you invest in a fund, they don't go out looking for new stocks to buy, they buy more of what they already own. If most of those are already substantially overpriced, you may be buying just before a large decline. Just think of all the folks who bought technology funds in late 1999.
@ PI -
I think the real lesson w/ Buffett and the original Berkshire is that it is very, very dangerous to buy into a business you do not understand. He totally misread what was going on in textiles and that business.
With funds ... I just like to go after names with successful long-term track records.
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