I subscribe to a very simple statement in investing: The price you pay for an asset will determine the value you receive. This statement can also be interpreted to mean that money is made when you buy an asset; you just don't know it until you sell it. This article will focus on common stock investing, but this price-to-value theory cuts across all asset classes, including real estate, stocks and anything else.
So, I enjoy watching prices in the stock market for ideas and opportunities. One way I do this is by regularly looking at the list of stocks making 52-week lows. Lately, this has been a frustrating exercise. At one point this year, the list consisted of fewer than 25 names across all of the U.S. stock exchanges -- that's a far cry from the thousands of names that were on it in 2009.
Today's 52-week list has expanded somewhat ¿ for example, Panera Bread (PNRA) is on the list. Trading at $146 a share, the shares have declined from $193. Yet stock prices should be looked at in terms of market cap, which is $4 billion in Panera's case. PNRA is still being valued at 22x earnings. While Panera's future growth is likely more optimistic than traditional fast-food brands, I don't put it in the same category as Chipotle Mexican Grill (CMG), so the current price is interesting, but not quite there yet for me. That being said, if the negative sentiment continues and the shares keep making new 52-week lows, it will be time to look closer at the stock.
Another list I like to look over consists of stocks with the largest percentages year-to-date declines. This list is very interesting because typically you will find high quality companies that are dealing with maximum negative sentiment. For example, I own shares of Whole Foods (WFM) now because of a 36% year-to-date price drop.
GNC Holdings (GNC) is down 41%, year-to-date. The retailer of nutritional supplements looks very appetizing on paper. The current market of $3.1 billion values the company at 12x earnings. Over the past three years, its net income has doubled.
But the past is the past and after spoiling Mr. Market on a high growth rate, there are concerns that growth could be stalling. GNC generates a ton of free cash flow. The supplement business is a very difficult one but GNC is the dominant pure-play business in the space. Consumers view many supplements favorably over chemical drugs. The negative momentum could create an even better opportunity.
Stock prices represent real tangible businesses. Yet the stock market often treats these businesses as pieces of paper that can trade wildly each day. Let such price irrationality guide your investment process.