How to Buy Value Stocks in 2012

 | Dec 29, 2011 | 3:00 PM EST
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Trading is about reading the tape and it's particularly been about reading the tape in 2011. This past year, traditional investing principles and the search for value has taken a back seat to amazing correlations between asset classes and sectors. There's been a stretch for yield that has buoyed the utilities, dividend mega-caps and energy MLPs. Left in their wake has been a slew of value-oriented stocks that are selling at ridiculously low multiples.

Buying value stocks has been a fool's game this year as value issues, such as Alcoa (AA), have gone from good value to great value to generationally strong value -- all while the stock price has continued to fall. Alcoa's debt levels are fine, their long-term growth story is intact and they have missed earnings expectations for valid reasons in a tumbling aluminum commodity market. Yet, they remain the worst-performing stock for 2011 in the commodity space, down 43% on the year.

Only a sharp reading of the tape could help you avoid holding this disaster in 2011.

This could be a column on using stop loss orders diligently, but it's not.

Because while it's a great thing to avoid a loser by not getting caught in a value trap, it's far better to get on board with a value stock that you can ride higher for months, if not years. Alcoa must represent one of those stocks again, one day.

And it's not the only one. I could name dozens of great companies with tremendous cash positions and steadily increasing growth that have been minefields for 2011, consistently recording a sinking share price. But here's the point: I think that many of them should be on your radar for 2012. They represent the best possible opportunities for large percentage gains in the coming year, despite, or particularly due to, their less-than-stellar performance in 2011.

Here's a quick list of some of the stocks that are on my screen today, stocks in which I have no position right now whatsoever: Ford (F), Agrium (AGU), Vale (VALE), General Motors (GM), Mosaic (MOS) and the previously mentioned Alcoa.

I'm sure you've noticed that these are some of the biggest dogs of 2011. However, all of them have compelling value stories to go with their very low share prices.

Just buying them and 'forgetting' about them, though, is clearly the wrong strategy. Before we add these issues to our portfolio, they'll have to prove something to us.

That's why I recommend a stop-win strategy -- the opposite of a stop-loss strategy. This is one of the few times where it's ok to buy a stock as it is going up. You'd want to look for an issue that has rallied more than 15% from its lows in order to prove enough momentum to spur excitement. In an issue like Alcoa, which is trading well below $9 a share, this only represents a mere dollar move, certainly not a lot to give away in a stock that you hope will show at least a long-term gain of more than 50% once you buy it.

This is the way to play value in 2012 -- find great companies, but let the tape tell you when it's time to buy. I believe value will be the watchword in 2012.

Columnist Conversations

I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
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