Buy Stocks at Depressed Prices

Jay Peroni, Lead Analyst, CEO and FounderBlog (Public), Crisis Investor, Value Investing

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Take Advantage of Stocks at Fire-Sale Prices – They’re Coming

It’s more than a little bit ironic that stocks have no trouble finding buyers when their trading at premium prices. Bull markets can make for impressive gains, but they can also set stocks up for a massive fall when markets reverse. Buying a stock, even a very good one, is a very risky proposition when it’s purchased at or near the top of the market.

At the opposite end of the spectrum, stocks attract very little attention during bear markets. But that’s actually the best time to buy a stock. At that point, speculation has been flushed out of stock and the market, and the stock is likely to be trading at below its real value.

Buying quality stocks at bargain basement prices is the most successful trading strategy of all time. But that requires buying stocks when everyone else is selling, and that takes some guts.

With the stock market looking very turbulent since last August, we may be due for a huge reversal in the market, and maybe even a full-blown crash. That will be the time to buy, but knowing exactly what kind of stocks to buy will be just as important.

Buying Stocks that Represent Real Assets

Stock market plunges usually accompany a bad economy. There are a number of indicators that we are heading in that direction right now. Weak economies and plunging markets tend to favor more basic investments, such as real assets. That’s because investors are less likely to take a chance on companies that represent certain social preferences during economic downturns. They just aren’t as reliable as they are in strong economic conditions and markets.

Real assets are typically where stock market recoveries begin. That’s because the economy needs real assets in order to grow. Companies that represent those assets are likely to be the first wave of stocks that turn up at market bottoms.

Real assets are just what you expect – real estate, precious metals, energy, and steel. Energy and steel are the most basic building blocks for economic growth. Real estate is an outstanding investment when purchased at market bottoms. And precious metals tend to react positively to the very kinds of turbulence that we’re seeing right now in both the financial markets and the economy.

This isn’t to say that now is the time to pour all of your investment capital into the stocks of companies that are based on real assets. It’s a bit early in the game, but that makes it the perfect time to begin tracking these investments so that you can get in at the most opportune time.

Buying Real Asset Companies at Deep Discounts

Real assets don’t always perform very well in strong markets, largely because investors tend to move beyond basic necessities in search of higher returns. Real assets become more valuable in turbulent markets and weak economies because of their absolute necessity.

We are at the very beginning of what is shaping up to be a bear market of historic proportions. As it advances, virtually all stocks will go down – the good and the bad.

That’s when it will be time buy stocks in real asset companies. The idea is by the highest value companies at the lowest possible price. We’re already seeing it play out in the energy sector, where many companies are trading near their 52-week low prices.

This represents an opportunity to buy some of the best quality stocks at deep discounts. The toughest question is “when to buy”? Move too quickly, you can get in at a point where you’re still riding the price down. But move too slowly, and you can miss the best returns.

Right now we’re seen turbulence in the stock market. The market is down roughly 10%, but it’s taking wide swings both up and down. That’s usually an indication that the greatest damage is still ahead of us. The best time to buy is when there is general panic in the financial markets.

The VIX can be a good indication of exactly when the best time to buy will be. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It indicates the market’s expectation of 30 day volatility, and is based on the implied volatilities of S&P 500 index options.

The VIX is sometimes referred to as the “investor fear gauge”; put another way, it’s the stock market’s panic button. If it reflects a value greater than 30, it’s flashing volatility based on investor fear. You should want to buy real asset stocks when the VIX shoots above 40.

Right now it’s trading at a very low levels, so it’s too early to make any wholesale moves, beyond raising cash.

Buying Irreplaceable Asset Companies is Even Better

There’s an even higher class of (generally) real assets, and they can be referred to as irreplaceable asset companies. These are companies that are deployed primarily in the economy’s infrastructure. They can be related to real estate, natural resources, energy production, utilities, transportation, and pipelines. All are irreplaceable components of the economy.

When the economy hits bottom, and a turnaround is at hand, stocks of these companies are often the first, best investments available. That’s largely because the services they provide cannot be duplicated. For example, once an electric power plant has been built, or energy pipeline has been laid, a competitor is not going to be able to open up next-door and duplicate the same service. Hence the service provided by the original company is irreplaceable.

7 Companies Worth Buying at Severely Depressed Prices

Seven companies with top-notch businesses that are worth buying at severely depressed prices include:

Billiton (NYSE: BHP). Based in Australia, this is a natural resources company was founded in 1851. BHP Billiton Limited discovers, acquires, develops, and markets natural resources worldwide. It operates through four segments: Petroleum, Copper, Iron Ore, and Coal. The company explores for, develops, produces, and markets oil and gas in the Gulf of Mexico, Western Australia, and Trinidad and Tobago. It also explores for copper, silver, lead, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and thermal coal.

EOG Resources (NYSE: EOG). This $57 billion oil and natural gas producer is focused on oil and gas fields located in stable countries, such as the US, Canada, United Kingdom, Argentina and China. That can make it an excellent play in the event of turbulence in the oil-rich Middle East.

Empire State Realty Trust (NYSE: ESRT). This is a real estate investment trust (REIT) that is centered in the New York metropolitan area, and invests in some of the top properties in what is typically the most stable and sought after commercial real estate market in the US.

Kinder Morgan (NYSE: KMI). This $48 billion company provides pipelines and terminals to transport both crude and refined energy products as well as coke and steel. It currently provides a solid dividend yield at around 2.3%.

POSCO (NYSE: PKX). This South Korean steel producer is one of the largest steel producers in the world. It also operates an engineering and construction division that builds industrial plants, civil engineering projects and commercial and residential buildings. It can be an excellent play on both real estate and a recovering economy if purchased near the bottom of the market.

Royal Gold (Nasdaq: RGLD). This company can be an excellent play on rising gold prices, that are likely to develop as a result of increasing turbulence in global financial markets. The stock is well off its lows for the year, with gold prices already firming in the past few months. Founded in 1981, and based in Denver, the company is in the investment, acquisition, and management of precious metals royalties and streams.

Transocean (NYSE: RIG). Founded in 1954, this $5 billion company provides offshore contract drilling services for oil and gas wells. What makes it unique is that it operates in technically demanding regions, such as deepwater and harsh environments. The stock is trading at the very bottom of it’s one-year trading range, and can be an excellent play in either an energy recovery or an energy disruption.

Keep your cool as you watch the turbulence increase in the financial markets. But at the same time, keep an eye on companies that are involved in real assets. They’ll be some of the best investments available when things get really ugly.


Additional Reading:

Fixed Income Challenges & Opportunities

Will Gold Protect You During an Economic Crisis?

How Will You Protect Your Portfolio During a Crisis?

How to Hedge Your Portfolio

Using Swing Trading to Profit in Volatile Markets

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While Dual Returns has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.