by Tim Melvin | October 23, 2013 12:18 pm
I am somewhat amazed at what’s been going on in the market for the last week or so.
Of course, the gyrations of momentum traders are always something to behold. But when we look at stocks like Google (GOOG[1]), we’ve seen tens of billions of dollars added to the market cap in just a very short time. There is simply no rational way to come up worth any reasonable, or even unreasonable, estimate of business value for either of GOOG stock.
It has been almost as silly in the other direction, too. Traders knocked billions off the market cap of Stanley Black & Decker (SWK[2]) after the company actually reported a 44% improvement in earnings. And Teradata (TDC[3]) saw its corporate value trimmed by something like $1.5 billion after the company lowered its forecast.
These wild swings in valuation have nothing to do with the worth of the company and are purely psychological in nature.
Yes, I am sure some people will make money out of this madness … but I suspect even more will follow the historical pattern of holding the match two ticks too long and getting burned.
That’s not a game I ever want to play with my money .
Instead, I would suggest most people’s time is better spent looking for out of favor companies with the potential for enormous rebounds over the next five years or so.
One sector that is clearly out of favor: Silver stocks. The current depressed level of silver has weighed on the price of the miners.
But I saw a report over the weekend from a commodities research firm that suggests that silver prices could easily rebound to new highs over the next decade … and the long-term rebound potential is of great interest to me as a deep-value asset-based investor.
Once again, rather than making a wish on burning match bets, I prefer to buy out of favor companies at a steep discount to their asset and business value. And a look at the silver miners shows deep discounts to the value of corporate assets that could lead to significant profits.
In reality, silver just needs to stop falling in price for these stocks to start to recover. If the analysts are right and silver hits a new high in the next decade, these could easily be the best investments you ever make in your lifetime.
I will let others play the frantic betting game that is momentum trading. Meanwhile, I will let time and patience unlock the value of cheap unpopular stocks.
Trust me — it is usually far more profitable.
As of this writing, Tim Melvil was long PAAS, CDE and SSRI.
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