The Market Inefficiency Report

Jamie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The election is over and the market is not happy. Stocks are plummeting after a narrow win for President Obama. By mid-day following the election the Dow Jones Industrial Index was on pace to have its worst day of the year.

It hardly seems rational to think that with one event, the election, investors would suddenly decide that stocks in general would be some 3% less valuable today than they were yesterday. It’s not like the outcome was any secret.

Can you imagine if Romney had won? Despite Wall Street generally supporting a Republican candidate, I think investors might have been secretly worried what a more austere Romney Presidency would look like. Stocks might have fallen even further than they have.

What we do know is that such a macro whitewash tends to throw out the baby with the bathwater. There is no rhyme or reason to the selling with respect to individual stocks. Valuations are ignored.

As a result there are plenty of intriguing nuggets of pricing inefficiency that rational investors can exploit for future profits. Here are a few stocks that might be worthy of another look:

Coal stocks crushed

The day after the election resulted in the unwinding of the Romney trade. Those stocks anticipated to do well under a Romney administration were sold heavily, too heavily in my opinion.

Front and center of this trade was the coal industry. Coal stocks plunged across the board. The idea was that Romney would remove some of the barriers for increased coal usage in the U.S. Now that Romney is gone I suppose coal usage will disappear as well.

What a bunch of hogwash.

Look at the carnage from Wednesday’s action. Peabody Energy was down 10%, Arch Coal (NYSE: ACI) was down 12.5%. James River Coal was the biggest loser with a loss of 30%.

It doesn’t get much worse than that. It also doesn’t get any more irrational.

While I can understand investors thinking about coal and energy as a black and white issue, the truth is much more complex. To assume that coal will not be an important part of President Obama's second term is simply naïve.

Coal has a valuable role to play and investors would be wise to use this selling as a great entry point into an industry that has lots of potential – despite whatever headwinds might exist.

I would probably favor Peabody Energy given that they are profitable. Analysts expect the company to make $2.00 per share in the current year and $1.89 in 2013. The negative growth is nothing to write home about, but shares do only trade for 13 times current year estimated earnings.

That’s a bargain in my book.

Impressive day for department stores

There were not many positive stories on Wednesday, but one sector that did relatively better than the rest of the market was the department store.

Leading the way was Macy’s (NYSE: M). Macy’s released earnings for the quarter ending October 27 with the holiday season right around the corner. The company announced it made a profit of 36 cents per share. That beat the average estimate of 29 cents per share.

Sales also beat expectations. Revenue in the quarter was $6.08 billion versus an estimate of $6.06 billion. The company was more cautious for the next quarter thanks mostly to Hurricane Sandy. The company expects a profit of $1.94 to $1.99 for the quarter ending January 31, 2013. The current estimate is at $2.05 per share.

In a more normal environment the impact of the Hurricane would be brushed aside by the market. It’s a one-time event, but on a day like Wednesday Macy’s ultimately succumbed to the selling pressure.

Beating estimates on both the top and bottom line is not easy to do in the current environment. Investors should look at any short term selling in Macy’s as a potential entry point.

Other department stores reporting results recently include Kohl’s (NYSE: KSS) and Dillard’s (NYSE: DDS). Kohl’s sank on Thursday thanks to weak forward guidance. Dillard’s shares were up nearly 5% thanks to an impressive earnings beat and strong same store sales.

Solid day for at home beverage maker

One absolute winner on Wednesday was at home beverage maker SodaStream (NASDAQ: SODA). Its shares actually rose on what was a whitewash day for the rest of the market. The fuel for the gains was a positive earnings report and increased guidance.

The company announced that it made a profit of 87 cents per share for the third quarter ending September 30. Estimates were calling for a profit of 74 cents per share. Revenues also beat expectations with sales of $112.8 versus the average estimate of $105.3 million.

SodaStream is a bit of a lightning rod stock. There is a significant amount of short interest in the company and skeptics of the business model abound. Analysts expect profit growth from the current year to the next of 25%. The stock currently trades for just 15.5 current year estimated earnings. Nothing in the report suggests that the company will do nothing but exceed those forecasts. There is a big push to sell its at-home beverage dispenser with deals at retailers including Wal-Mart, but is the product just a fad?

The obvious comparison is to the at-home single serve coffee dispenser. Will SodaStream enjoy a similar trajectory of that popular product? If so shares could go much, much higher. At a minimum, play this one as it is on the hyper fast sales growth path. It might not be sustainable, but the time to exit is still far away.

Selective buying in a fearful market

I get it that investors are sensitive to future fears. There are plenty of things to be frightened of in these uncertain times. That said, across the board selling creates selective buying opportunities.

Try to focus on stocks where common sense is taking a back seat to irrational selling. Your portfolio will be happy you did.

Pop the Top for More Analysis

SodaStream is blazing as a consumer-facing growth stock -- and it's just the kind of stock that legendary investor Peter Lynch used to single out before his peers caught on. Take a look at our analysts' premium report that will pique your interest.


Fool blogger Jamie Dlugosch does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Dillard's and SodaStream. Motley Fool newsletter services recommend SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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