Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.
Wall Street is the place where it's always darkest just before it gets pitch black. Pessimism (also known as fear) can grip investors firmly and paralyze them, particularly when it comes to buying stocks related in any way to mortgages. Many investors are afraid and fear the worst is still ahead. It may be. But it may not be.
The fear is certainly founded in experience. Any one owning stocks such as Countrywide Financial Corporation (NYSE: CFC), Citigroup Inc. (NYSE: C), Merrill Lynch & Co., Inc. (NYSE: MER) or Washington Mutual, Inc. (NYSE: WM) saw tremendous losses in 2007. These stocks lead the financial sector on the way down. And they should have. Their losses were catastrophic with writedowns of mortgages and derivatives in the billions of dollars. And no one really knows how bad the next surprise will be. So the natural and survival related reaction is to simply stay away from these stocks.
That would be a mistake. These are some of the largest companies in their fields. They are leaders. While they got greedy and paid the price, these firms have been around for a long time and have made profits for years. Countrywide had 25 years of profits before it took its first loss last quarter. It may take another loss for the fourth quarter of 2007. Management stated early in the quarter that it would show a profit. But investors are skeptical. The stock continues to hit new lows.
While it's prudent to be skeptical, it can be short sighted to simply ignore these sectors. No one knows how bad the fourth quarter was for these and other financial stocks. We'll find out in a few weeks when earnings are released. But what if the worst is behind these stocks? What if profits are back even if only by a small amount? If so, these stocks will soar. They're priced for the worst case: more losses with more to follow.
Smart investors will start buying small amounts of several different financial stocks now. If they're right, the rewards will be unusually high. If they're wrong, since they've only bought a small amount, they can buy more as the prices go even lower. But the key is to start buying before the institutions come back into these sector leaders. When that money starts flowing into these large cap stocks, the prices will move as quickly on the upside as they did on the downside.
And then there are the short sellers, the speculators who have sold these stocks without owning them so they could benefit from a price drop. They will have to buy back the stock as it goes higher, adding more buying to the rally.
Things aren't as bad as many believe. The resilience in the American economy is always much stronger than most predict as it goes through cyclical phases. Interest rates are going down. Employment is going up in the service sector. Housing will stabilize, most likely in 2008, maybe even head higher by the end of the year. Don't run from the stocks that have grabbed the headlines. They will be back, and they'll once again lead their industries. Then they'll be in the headlines for good reason.
Proceed with caution. It's not time to get too bullish yet. Wait until more data comes out. Remember, these stocks have fallen a long way. When the sentiment turns, they will rise spectacularly. You don't have to try to catch the bottom to make great money on them. It's time to start taking small positions.
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Reader Comments (Page 1 of 1)
1-04-2008 @ 11:15PM
tina3219 said...
countrywide you are going DOWN.