When Russell Sage was asked how to to become wealthy, he replied: Buy straw hats in the winter. Who was Russell Sage? A Congressman from New York who was also a Wall Street financier who died with $70 million....in 1906. His (sage) advice still works today, especially for stocks.
If you can buy stocks when they're out of season, or more likely, out of favor, you've got a much better chance of making money than when everyone else is jumping on the band wagon. The key item to remember is this: there are four seasons in a year....every year, and when you buy straw hats in the winter (on sale no doubt), you know summer will be coming and their price will go higher. There are no seasons in the stock market. A stock out of favor now could stay that way for a long, long, long time. Even go bankrupt. So don't believe that a "cheap" stock now will automatically become valuable later.
Having raised the caveat flag, there is every reason to heed Mr. Sage's wisdom. A stock out of favor often comes back, especially when it is being sold because its industry is scorned even if the stock continues to increase earnings.
Right now, a great example of that is the banking industry. There are many solid banks that continue to do well in this economy that have seen their prices go down dramatically because the largest banks have had large losses. The assumption is that when the industry leaders are in trouble, all stocks in the group are in trouble....or will be. But that is not the case every time.
The largest banks (Citibank (C), Bank of America (BAC), JP Morgan Chase (JPM)) are international in scope with wide ranging products and services, everything from investment banking to checking, from foreign exchange to mortgages. They make money where they can in all financial transactions.
Compare those to regional or community banks. These banks have much narrower focuses. They tend to stay close to home and offer fewer products, not necessarily fewer services. Their assets are usually single family or commercial or multi-family mortgages. They know their communities or regions well and have many branches to serve their client base. Many have gotten into big trouble because they are limited in their reach. If their area has been particularly hard hit by the recession, they can't make loans in healthy areas. They can buy securities such as mortgage backed bonds but they don't generate fees or have the yields that local loans do.
But there are many banks in good pockets of the country that are doing very well, have good growth, pay a decent dividend that is safe. Those banks are still solid investments and have been tarred with the same brush as all banks. Finding those will pay handsomely when banks come back into favor.....and they will. An example: NB & T Financial Group (NBTF), a regional bank in southeast Ohio that earned $2.84 a share last year. The dividend yield is 6%.
Another industry out of favor: housing....and with good reason. There's nothing positive in the headlines about this sector. But for investors, it's a group that deserves close attention. Whoever is left has survived the worst economic recession in 70 years. Management has been able to keep building, keep the doors open, even in these tough times. Housing will be back. The question is when. No one can foretell. But when lending loosens a little more, unemployment drops, and consumers feel it's safe to spend again, housing will be one of the first beneficiaries of better times. Investigating the strongest survivors in the housing market should be a good way to spend time. Names like D.R. Horton (DHI) Lennar (LE) and PulteGroup (PHM) seem worthy.
You get the picture: stocks that other investors are selling may be treasures within a year or so....maybe sooner. No one can give good timing. But if you look where everyone else isn't, you can discover good stocks that will most likely again be crowd favorites. Patience is required.
- Ted Allrich
September 14, 2010