Cheap for a Reason?

When stocks seem cheap, there usually are reasons. To a degree, citing these is just an exercise in the obvious. A good investor wants to know if the problems cited are permanent or temporary. A change that affects the business model of a company or industry can be considered permanent. However, a business downturn generally or in a sector is usually temporary. Temporary problems can provide opportunity; stocks with permanent ones need to be avoided.

Presently, small- and mid-sized companies’ valuations are depressed. This is because of the rampant pessimism among institutional investors. These categories are not as liquid (easy to trade without price disturbance) than the large mega cap issues. Institutional types want to be able to move in and out quickly or adjust their holdings on the fly.  Because of this, opportunity has emerged in the small and midsized space.

There are many quality companies with excellent business prospects in these depressed categories. The reason they are cheap has little to do with their individual outlooks. It is the institutional focus on high liquidity. Markets will eventually broaden. The timing may be hard to pinpoint, but it will happen. Opportunity may be staring right at us. The only requirement is the ability to be patient, with staying power. The Bull and his partners are focusing on the next three to five years, not next month. Stay steady my friends.

The Lonely Bull