EPIC Buying Opportunity for These 5 Stocks
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Beware Falling Knives, But at Times it May Make Sense to Try to Catch a Few.
Trying to catch a falling knife can be painful. As we approach the 4th quarter, some hedge funds will be reducing allocations to risky assets. Tax loss selling will also play a role in market technicals over coming months. Yet, when hedge funds AND retail investors are selling stocks, Foolish investors should be looking to buy. I fully recognize that contrarian investing is difficult, but it can make a huge difference in performance results.
Missing the Bottom
I don't recommend trying to catch falling knives on a routine basis. So, in an effort to keep myself from suffering multiple flesh wounds, I apply trading constraints. For example, I dollar cost average into new positions. This is extremely important because it mitigates both company specific AND overall market risk. Implicit in this approach is an acceptance of the fact that I will frequently miss, "the bottom."
Missing the bottom is not the end of the world for 2 reasons. First, the bottom may be tested giving one another bite at the apple. Second, there are always other stocks to consider besides the ones that got away. I maintain a watch list AND a wish list. My watch list consists of a few dozen stocks that I'm generally-to-extremely familiar with. As an independent consultant in the natural resources space, I have a lot of coal, iron ore, potash, uranium and oil/gas stocks on that list.
Try to Keep Both a Watch List and a Wish List
A subset of the watch list is my wish list. These are stocks that I've done A LOT of research on and in many cases have followed for years. Stocks on this list are ready to be bought at the right price. I'm comfortable owning BHP, (NYSE: BHP) at a price of $63 per share. If BHP hits $63 I might, (nothing's written in stone) buy a quarter or a third of a position and see what happens.
A key thing to watch out for is market risk. For example, if most of the price targets on my wish list are triggered in the same week, I don't buy them all. I either lower target entry points or buy just a few. The same goes for sector risk. Since coal stocks are highly correlated to each other, if they go down 15% in a week, I don't buy 4; I might bite on just 1.
When Bottom Fishing, Consider Long-Dated Call Options
I like to use long-dated call options to bottom fish. A 6-9 month time horizon should be long enough to capture a lot of capital appreciation. Options involve the real possibility of losing 100% of one's investment, but the capital at risk is lower and the upside can be multiples of that invested.
A few stocks on my wish list include Walter Energy, (NYSE: WLT), Rio Tinto, (NYSE: RIO), Vale, (NYSE: VALE) and Teck Resources, (NYSE: TCK). I've written about these names in the past, and I currently own Walter, Teck and Vale.
Although coal prices have cratered, Walter Energy is unique as a pure-play, premium hard, low-vol coking coal producer. Once tagged as a high cost producer, Walter's delivered cost, "on-the-boat" is looking really good lately. Compared to Australia's Bowen Basin where costs have sky-rocketed, Walter's costs have been essentially flat. As such, I strongly believe that Walter is a prime take out target.
In addition to coal, iron ore prices have tanked to $90 per metric tonne, a level that many did not believe possible. Still, Rio Tinto and Vale are killing it with all-in costs in the $40's per tonne. Rio and Vale stand to gain market share as higher cost players like Fortescue Metals slash growth to reign in cap-ex. Top-3 producer BHP is also slowing its ramp up in iron ore. Vale is especially interesting with a dividend yield close to 7%. Rio has a highly prospective copper/gold mine about to be commissioned in Mongolia.
Teck Resources is the 2nd largest premium hard coking coal producer in the world. Importantly, Teck's coking coal comes from Canada, not Australia, enabling customers to diversify sourcing decisions. Teck's robust copper growth and emerging oil sands assets make it a winner, at the right stock price.
Consensus earnings for coal and iron ore producers are too high. There could be epic buying opportunities in a handful of natural resource stocks as analysts cut estimates and target prices in coming months. I mentioned BHP at $63 per share as a relatively low-risk opportunity. At $15 per share I might double-down on Vale as its annualized yield would be 7.7%. If Walter hits $28-29 per share, I think the risk/reward becomes too compelling to ignore. At $40 per share, Rio would offer excellent relative value and a dividend yield above 4%. Teck is trading within $2 of my target price of $25 per share.
Will any of the above mentioned stocks reach my price targets? I don't know. Will I automatically buy a stock that reaches its target? No. But I have plenty of stocks on my wish list to choose from. And, as market conditions change, my strategy changes along with it. The key to bottom fishing is patience.
MockingJay2011 owns shares of Walter Industries, Vale, and Teck. The Motley Fool has no positions in the stocks mentioned above. 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.