Here'sone certainty about the stock market: The market does not know who you are. The stock market exists because every day, thousands of buyers and sellers come together to buy and sell shares. Many market participants fail to produce results because they let the actions of those individuals, and not the fundamentals driving the business, determine whether they buy or sell.
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Buy Low Sell High
Of course the way to exceed in investing is to buy at one price and sell at another price. In bull markets its seems as if all investors are buying low and selling high. But as investors know all too well, bull markets are not permanent and successful investors do well in both bull and bear markets. Many investors let emotions dictate investment decision making and thus chase popular businesses and abandon unpopular businesses. When Netflix (Nasdaq:NFLX) was popular, investors well happily paying 70 times earnings for the company. Now, after a few setbacks, shares trade for $64 and less than 15 times earnings, yet investors are running away. Unpopularity in investing is actually a good thing: The opportunity to buy cheap is greatly increased. Price paid confers value received, and the lower the price the better. (For related reading, see Digging Deeper Into Bull And Bear Markets.)
Big Returns Await
Meredith Corp (NYSE:MDP) publishes over 20 subscription magazines like Home and Garden and operates 12 television stations. With the Internet changing the face of advertising, magazines are no longer a glamor growth business. But Meredith's assets continue to produce solid consistent cash flows and the company is rewarding shareholders with 5.7% dividend yield. At $29 a share, the company is being valued at 10.7 times earnings, a favorable multiple for a big yield.
The market cares little for construction stocks today. So names like Sterling Construction (Nasdaq:STRL) and Terex (NYSE:TEX) are trading at favorable prices. Terex trades at 75% of book value, while Sterling trades at 70% book. Sterling already generates excellent profitability, while Terex has restructured the business that will be very profitable in the near future. Neither company has any exposure to residential real estate construction.
The Bottom Line
Popularity is the enemy of the stock market investor. Investing is all about making money, not about doing what is popular. Buying at favorable prices often requires buying stocks that are out of favor.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.