1/19/14

If your sitting in cash and scared to come back into to the stock market, I have some advice for you.

Let’s be honest the markets have become complicated. The so called safe haven investments, treasury bonds and gold, lost 8% and 28% last year, respectively. And the stock market is sitting at all time highs making it more difficult to find value.

Even a bigger problem, interest rates and savings rates are so low that even putting your money in a savings account or a CD will still lose you money. Saving accounts, money market funds and CD’s are yielding less than inflation.

This environment is telling you, you must invest in stocks. But you can’t just buy some index fund or mutual funds that exposes you to potential losses of 20% to 30%. Instead you need to invest tactically in strategies that have good risk/reward profiles.

One of these low risk-high reward strategies is buying deep value stocks – but only when there is a catalyst in play.

Undervalued stocks are usually beaten down in price, selling at their 52 week low or even a 3 or 5 year low. They are usually selling at a discount to the value of their assets, their future cash flows or revenues and they have usually have a lot of cash.

Now, a catalyst is what helps reprice the stock and narrows the gap between the stock’s intrinsic value and its current undervalued share price. The strongest catalysts are when activist or influential investors own the stock and are pushing on the company and management to instantly create shareholder value by: 1) forcing them to buy back their stock, 2) sell some of their assets or 3) even sell their company. Other catalysts can be both significant insider buying and companies that have hired investment banks to help them find a buyer for their company.

When you combine these forces together, deep value stocks with catalysts, you get one of the strongest risk/reward investments out there.

Also for people who are scared to get back in the stock market these levels, these types of stocks should make you feel comfortable. You are buying stocks that are cheap in price, and you also have a catalyst present that can put a floor under a stock and begin pushing the stock higher. And that mix can quickly change investor perception surrounding the stock.

Will Meade
President of The Billionaires Portfolio
Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor