This commentary originally appeared on Real Money Pro on April 29. Click here to learn about this dynamic market information service for active traders.
"Never catch a falling knife," is so ingrained in our consciousness that we often miss buying screamingly cheap stocks simply because they haven't shown they've turned the corner yet.
Any stock you buy could go lower whether it's in an uptrend or a downtrend. It feels much more comfortable, though, committing to a stock that others seem to like. Unfortunately, that means paying higher entry prices than were available not long before.
The converse is also true. Buying off the "new lows" list might seem crazy but it guarantees your price is less than anyone else paid for those same shares during at least the preceding 12 months. Traders and investors with reasonable time horizons get paid very well for making the "uncomfortable" play which others are afraid to take.
Financially sound, profitable companies are not going to disappear. The most hated stocks tend to bounce back stronger and faster than most people expect. Like most stock market action the rebounds occur before any documented good news is evident.
A stock which has dropped by half is down 50%. It only takes a partial rebound from that low point, though, to make well more than 50%. A simple return to the pre-selloff price represents a 100% profit for intrepid buyers at the nadir.
Oil prices are still near multi-year lows. Buying Exxon Mobil (XOM), down 26% at last August's bottom, would have seemed foolhardy, based on fundamentals. It has already come up by almost 33%.
Staid real estate investment trust Mack-Cali (CLI) hit a multi-year low of $16.85 last June and was "too ugly a chart" to interest momentum players. Its shares rallied by 44% by late December, before providing a second chance at similarly great gains this past February. In both cases you needed to ignore the "falling knife" platitude in order to get in near the lows.
I took a lot of heat when I averaged down on Valmont Industries (VMI) as it gradually fell all the way into the low $90s. There hasn't really been a lot of good news yet but the stock recently hit a new 52-week high above $145. It didn't take all that long for buyers on the way down to start seeing large percentage gains, magnified by the historically low purchase prices.
XOM, CLI and VMI have already recovered too much to be super attractive right now. Here are a few names that still appear to have good upside, however.
Polaris Industries (PII) got whacked by more than 56% when recession fears were at their peak. From today's price it's still down more than $55 per share from its old high.
Agribusiness giant Bunge (BG) fell by more than half from last June through February's low. A great first-quarter report has it moving today but it could easily tack on another $15 to $25 a share and still be reasonably valued.
Neither of those names are still falling knives. Truly brave souls might want to take a stab with the much-maligned shares of Perrigo (PRGO) while they are still making new bottoms. The firm's balance sheet is solid. Perrigo's newly downwardly revised estimate would still represent all-time best results per share.
The old CEO, now moving to Valeant Pharmaceuticals (VRX), turned down a $26 billion takeover offer for Perrigo as "inadequate." People willingly paid double the Apr. 27, 2016, price and they will likely pay quite a bit more for it again in the reasonable future.
You can now get paid well for making the unsettling trade rather than a popular one. All those previous examples appeared equally scary when they were carving out what now seem like bargain-prices from just months earlier.
The absolute risk in PRGO is now lower than it was before simply due to the entry point. Don't bet the farm but consider nibbling at, or adding to PRGO positions while the price is cheap.