Turning Trash Into Treasure

 | Sep 18, 2013 | 11:00 AM EDT
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Mark Twain once said, "The only way to keep your health is to eat what you don't want, drink what you don't like, and do what you rather not." That quote basically sums up what you need to do to invest successfully. The only way to prevent permanent loss of investment capital is to buy when others are selling, like stocks that everyone else hates and behave in contrast to the crowd.

Consider this: The amateur investor who bought stocks in 2008 and sells today will likely have a five-year annualized return that will beat the next five-year annualized return generated by the most sophisticated investor. Equity prices all but guarantee that -- regardless of investor's skill. Five years ago, shares in Whole Foods (WFM) were trading for less than $10; today they are at $58. They would have to move up to $300 in five years, or a valuation of $100 billion, to match the past five years. Apple (AAPL) shares, at $140 five years ago and $460 today, would have to reach $1,300 in five years and a market cap of $1.2 trillion. It won't happen.

In other words, Mr. Market's "trash" stocks, those that are neglected, can often become the most treasured investment opportunities. Believe it or not, Mr. Market is still throwing out some companies today -- certainly not with the same fear as we saw in 2008 and 2009 but with same set of circumstances: These stocks are likely to be the big standout performers over the next two to four years.

Chesapeake Energy (CHK) and General Motors (GM) are two large-cap names that come to mind. For differing reasons, both are likely to advance by 60% or more in the coming years. In the case of CHK, the combination of increased demand for abundant cheap clean natural gas along with asset monetizations, the shares could trade north of $45 in a couple years. GM has become a leaner more efficient automaker and is producing better vehicles in the midst of a strong auto cycle in the U.S.

In times of market optimism, pay close attention to neglected babies being thrown out with the bath water. Remember: Many of today's darlings were once orphans. 

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