Picking What's Left When the Party's Over

 | Sep 01, 2011 | 12:00 PM EDT
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An acknowledged hazard in having a strict investing strategy is the invectives of those who do no espouse said strategy.

For me, it's not buying stocks like Apple (AAPL) or Netflix (NFLX).

It's true.

I never own the popular stocks when they are popular. I never get the rush of seeing my stock get the exciting headlines or hear them discussed around the water cooler. Of course the flip side of that I never find myself wanting to drown myself in the water cooler when the popular stocks are no longer loved by one and all.

All parties eventually end. On Wall Street they end very badly for those who stay too long. I have met too many people who rode the excitement to riches and then saw it all disappear when the music stopped. LBOs and junk bonds made a lot of people a lot of money in the 1980s. It went away quickly and the sound of margin calls and creditors' attorneys was deafening. Savings and loans were crushed in the early 1990s, as were health-care stocks. We all know what happened with the new paradigm technology stocks of the late 1990s.

The cycle has played out too many times, with devastating results, for me to have any desire to own the popular and exciting stocks or assets. It is in the aftermath of the party that I start to get interested.

When markets are rising sharply I can find very little to buy that fit my strict criteria. I spend a lot of time building lists of stocks I want to own if they ever trade at my levels. That's the biggest reason I favor the deep-value-asset based approach to investing. The advantage of this method is that you really only have to be right once or twice a decade. Buying stocks during fire sales such as December 1988, the LTCM meltdown in 1998, the aftermath of the Internet bubble or at the height of the credit crisis in late 2008 can offset a lot of other mistakes you might make along the way.

It can be scary, but there are so many stocks trading well below tangible book value the methodology forces you to be a buyer.

That type of opportunity seems to exist today. It is there in the regional banks stocks and certain real-estate securities.

Look at some of the stocks I have been suggesting in the past two weeks. Key Corp (KEY) is $6.50 down from almost $40. Fifth Third (FITB) is now a $10 stocks that was once over $60. Hudson City Bancorp (HCBK) is a $6 stock that has fallen from $25. Sunstone Hotel Investors (SHO) is another $6 stock that was over $25 not that long ago. Kite Realty Group is $4 down from over $20. Cedar Shopping Centers (CDR) once traded for $26. Today it is $3.60.

All of them trade well below tangible book value. They are unloved, unpopular and spectacular cheap. Real estate and banks have issues related to weak commercial real estate markets and a soft economy. But these stocks are all priced as if the world is ending.

If the world does not end these companies will eventually recover and thrive. Their stock prices will reflect this and investors will make a lot of money. The end of the world has been predicted many times over the years. So far it has not happened and that's the smart way to bet.

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