Let's flash back over 35 years ago to a brokerage office in Merrillville, Indiana.
There you will find a young Steve Reitmeister doing a summer job for his father. Sure I was trying to earn extra spending money. But, more importantly, I was a budding young capitalist eager to learn about investing in stocks. So who better to learn from than my father, a seasoned Certified Financial Planner?
So dad pulls out the, seemingly 50 pound, hard copy Value Line Investment Survey binder. He reviews the basics with me. Such as, buying stocks is really about taking an ownership stake in the company. And the healthier the company and the more earnings it generates the higher the stock price will go. He then leaves me for a while to do some research on my own.
I was immediately drawn to the valuation section for each stock. In my mind it made no sense to buy a stock that they only expected to go up 30-50% when some had the potential to go up 100, 200 even 300%.
My dad tried to explain to me that quite often they are discounted for a reason. Many of them were troubled companies producing poor earnings results and suffering from declining stock prices. This made them risky investments and perhaps should be avoided.
No matter how hard he tried I could not be swayed. I wanted the chance at the higher potential return. Right then and there, it was clear I was a value investor.
The story since then is one of some glorious successes (buying Amazon at $8.65 and Priceline at $14.62 after the internet bubble burst). But also a story of some shocking failures (watching shares of @Home and CMGI go from bad to non-existent).
So the purpose of this article is to share 3 key lessons learned over these 35+ years with other investors who enjoy the thrill of profiting from great value stocks.
Lesson 1: Why Pursue Value Stocks?
There are many ways to invest successfully. Yet the appeal of value stocks is broad based. That's because no one will pat you on the back for buying a well-known company like Apple at $100 and selling it for $120.
The joy of the value story is that it's often a discarded or unknown stock that no one else wants to touch. And when it goes up you get great satisfaction in the "I told you so" moment when you share the story with others (Many of whom didn't take your advice in the first place. Shame on them ;-)
But more importantly, there is great satisfaction in the outsized returns that occurs when you guess right on a previously neglected stock. And that is the best reason of all to actively seek out these value candidates.
More . . .
Free 7-Day Access to All Zacks Trades
For the next week, you can follow all real-time buys, sells, and market insights from all Zacks' private portfolios.
Just what do we mean by free? No cost. No credit card needed. No obligation to subscribe to anything.
This unique 7-day test drive is the best way to sample the power of the Zacks Rank. Deadline to get started: Saturday, July 29.
Click now for free access >>
Lesson 2: Wait for the Proof
The one thing that all my value stock failures have in common is that I got in too early. Meaning I was buying in on the way down, hoping and praying that a turnaround would take place. Too often that turnaround did not materialize and my hard earned money was washed down the drain.
So the key is to have the patience for the company to show you undeniable proof that an upturn in business performance is occurring. The clearest form of proof is when the company delivers a big positive earnings surprise that Wall Street analysts fawn over with greatly increased earnings estimates for the future.
Yes it's true that the stock will jump on that news and you will not grab the stock "exactly" at the bottom. However, your entry point will be plenty low in the grand scheme of things. Plus you have now GREATLY increased your odds of being in a winning and timely trade.
Lesson 3: Growth Stocks Can Be Value Stocks Too
You are bound to discover that value stocks exist in every industry with companies big and small. So your choices are abundant. However, the best returns will come from buying the stocks that have the highest growth rates. That is because once the turnaround takes place the PE will start to rise from abnormally low levels. The higher the growth rate of the firm the more the multiple will expand and the greater your final return.
My two previous success stories of Amazon and Priceline prove out my point. These stocks are up 91X and 139X respectively since I bought them sixteen years ago. That's because they are still experiencing the phenomenal growth associated with being internet ecommerce leaders. However, we all know I would not have fared as well if I invested in more pedestrian stocks like a phone company or bug exterminator.
Long story short...focus on growth stocks for the best value investing profits.
Where to Find Trades that Are Best for You?
I have just given you a quick download of my investing experience - what I learned from more than 35 years of successes and failures.
My hope is that the learning curve will be a whole lot easier for you.
Yes, looking for value in the market will get you on the right track but there's a complication. In a world with over 10,000 stocks to choose from, far too many will seem to fit the bill.
That may be fine if you have 60-80 hours per week to focus on researching the full list. But for most investors, it's usually better to start by looking at recommendations from experienced professionals with strategies and a track record you can trust.
That's why back in 2011, I started a program to provide access to all of our buys and sells, even to portfolios that are normally closed to new investors. It's called Zacks Ultimate.
Since that time more than 70,000 investors have taken advantage of this opportunity to sample the real time picks from short-term trading to long-term investing. But not everyone has taken advantage. So today I am offering it to you at the "ultimate price": Free. No credit card needed. No obligation to subscribe to anything.
Starting now, for 7 days you can have our full team of experienced investors on your side and follow:
• Value stocks as they start to climb upward.
• Earnings surprise stocks before they report earnings.
• Our best stocks under $10 with strong growth potential.
• Selected insider trades (the legal kind).
• My personal portfolio with trades I am making for my own family.
• And more.
Don't miss this unique 7-day test drive. Deadline to take advantage is midnight Saturday, July 29.
Start your free 7-day access to Zacks Ultimate now >>
Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks.com and all of its portfolio services and research tools for individual investors. Today he is pleased to offer all the private buys and sells through 7-day free access to Zacks Ultimate.