Almost every Christmas gift – from the novelty t-shirt to the shiny new luxury sedan in the driveway with a big theatrical bow on top – will eventually decline in value. So why waste your money? As it has been demonstrated time and again, you'd be better off giving cash to the people on your list (as would they). Of course, society has concluded that doing so is a colossal breach of etiquette, so we maintain the ritual of spending more than we should for stuff that the recipients might not even appreciate. (For other gift ideas, read Gifts That Help Save Money.)
TUTORIAL: Stock-Picking Strategies
If you really care about the people on your list and want them to truly remember this holiday season, help them build wealth. Buy them something with the potential to appreciate in value, like a stock.
The same strategy you've used for buying conventional gifts also applies for buying stocks; i.e., you're going to want to look for discounts. Only instead of comparison shopping for the same item at different retailers, look for stocks whose owners have priced them low ... too low.
There's a difference between a cheap stock and an undervalued stock. While the former aren't worth very much and probably never will be, the latter are just priced inaccurately. Buyers are panicking, acting irrationally and shrewd sellers are doing little to discourage them.
One of the surest ways to pick an undervalued stock is to look at one that's been temporarily crippled by a single, extraordinary event. The classic recent example is BP (NYSE:BP), which spent a brief period as America's most hated company after last summer's Deepwater Horizon oil spill. Today, the Gulf of Mexico is clean and BP's stock has risen 50% in a year and a half.
This being December, some stocks are underpriced for reasons beyond market fluctuations. Take fictional stock MNO, which is down 49% for the year. If MNO is held by enough mutual funds, the managers of some of those funds will look to unload it by the end of the year. Why? Because if the managers don't, MNO and its poor performance will show up in the fund's annual reports, an eternal testament to the managers' perceived lack of acumen. (For more information on fund managers, see Choose A Fund With A Winning Manager.)
Never mind that the 11th day of winter is as arbitrary a day as any to end the year on. Our ancestors chose December 31, and here we are.
Stocks such as Bank of America (NYSE:BAC) fit the profile. It's widely held, highly publicized and down 67% from its 2011 high (and 90% from its 2007 high). Does that make it a smart purchase?
Well, even though the scandals of the last couple years are behind it, BAC's fundamentals remain awful. The company lost $3.6 billion last year, and through three quarters of this year, it remained in the black. However, the likelihood of its value falling even further is small. For better or for worse, we live in a society where BAC's failure is pretty much forbidden by federal lawmakers and executives. They warned us against "systemic failure" shortly after BAC joined the Dow in February of 2008, due to incestuous relationships among banks. Today, BAC's five largest shareholders include Citigroup (NYSE:C) and JP Morgan Chase (NYSE:JPM). The more things change, etc. (For more, check out The Evolution Of Banking.)
BAC also suffered from a big public relations blow this past year, announcing that its debit card holders would now pay $5 a month for the privilege of holding said card and not expecting any fallout. The fallout came, and BAC's reversal of the policy a few weeks later didn't get anywhere near as much attention as the decision to implement it in the first place.
Why Choose Netflix?
Contrast that with Netflix (Nasdaq:NFLX), another company that took a temporary public relations hit this year (and which a lot of institutional investors might be looking to discard.).
If you missed it, in September NFLX changed its pricing structure in an attempt to encourage people to stream videos online rather than receive them in the mail. Customers reacted as if NFLX was now including a vial of anthrax with every rental. Three weeks later the company backpedaled, but the stock kept sliding. Right now, it's down 78% to $68.45 from its July high of $304.79.
But Netflix still makes money, more every year than the previous one. Ditto for the growth in shareholders' equity. The company continues to boast tens of millions of subscribers, several times more than its nearest competitor. Netflix still has a recommendation algorithm that's the envy of the industry. Some subscribers canceled when faced with the horror of having to log onto separate websites for streaming and DVD rental, but not nearly enough to depose Netflix from its perch. The company has spent its short life on the edge of the changing technological curve. All things considered, Netflix remains one of the most customer-friendly companies around, offering its clientele as much entertainment as they can digest for an awfully reasonable price.
The Bottom Line
The people on your list are already corporate customers. Give them an opportunity to be corporate owners ... because wealth is the greatest gift of all. (And if you think I'm being funny, don't forget what one of the original Christmas gifts was: gold.) (For some great gift ideas, read 9 Meaningful Holiday Gifts.)