Going against the stock market that just proved an asset is not attractive is not only risky, but it is counterintuitive to the emotional decision-making that takes place in financial markets.
I always scan the stock market for positions at their 52-week lows.
The reason for doing this is twofold: 1) to identify potentially attractive buy low/sell high assets; and 2) to assess what Wall Street dislikes for the purpose of honing my market view.
What you want to look for isn’t a company that is going broke or whose business plans have failed, but a large-cap, brand-name company—a leader within its industry that is down on the stock market for its own specific set of reasons.
One company that exemplifies the scenario I’m describing is Barrick Gold Corporation (NYSE/ABX).
This blue-chip gold producer has been having a very tough time on the stock market. The position is down another 10 points since April and has been cut in half since last November.
Barrick Gold’s stock chart is below:
Chart courtesy of www.StockCharts.com
Barrick Gold looks like a good buy low/sell high trade candidate. But obviously, there are two immediate explanations as to why the position just bounced off a major low: weaker gold prices and rising production costs.
The company did particularly well on the stock market between the mid-1980s and mid-1990s. Then it took a break for a good 10 years, doing nothing except paying its dividends.
I would now keep a sharp eye on Barrick Gold for a buy low/sell high trade. But here’s the thing: the company’s fundamentals are not going to suddenly just improve and turn on a dime, even if gold spikes higher. The company does have structural operational issues related to costs and shareholders aren’t happy.
With a four-percent dividend yield, a buy low/sell high trade on a position like Barrick Gold is becoming attractive.
Clearly, the gold bugs are taking a break, but practically speaking, the spot price of gold isn’t down too much from its high.
The buy low/sell high investment strategy does take a lot of determination, forbearance, and luck. It is, after all, a risk capital trade.
It’s worth scanning the stock market, if you’re so inclined, simply to see what the rest of the stock market dislikes. (See “Unbelievable Stock Market Now Destined for Greatness?”)
To buy low/sell high in large-cap, blue-chip companies, it really is more about getting the cycle right. And that cycle includes both fundamental economic factors and sentiment.
Bottom-fishing in the stock market is always a tough business to be in. But then again, you can land a really big trophy there.