Take a broad view of investments to find cheap stocks to buy now. That will help you spot stocks worth owning—rather than stocks that are cheap for a reason.
The stock market is more efficient than the car market, as an economist would put it. You can’t negotiate a favourable price for a stock. To get a lower price, you have to wait for the stock’s price to come down.
However, there are elements to consider when looking for the best cheap stocks to buy now—that is to say, not every stock that looks like a bargain is really a bargain for investors.
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There are cheap stocks to buy now, including value stocks and penny stocks, but some are cheap for a reason
Undervalued stocks are companies that have strong fundamentals and are trading, for one reason or another, at a low share price.
When you’re looking for undervalued stock picks, focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele. Undervalued stocks like these are hard to find, even when the markets are down.
Meanwhile, investing in penny stocks—which generally trade for under five dollars a share, and as the name implies, sometimes for pennies—is one way to buy the cheapest stocks right now. But you need to be very careful. Penny stocks do sometimes pay off, but there are considerable pitfalls to avoid and you have a high probability of losing money.
The best cheap stocks to buy now will typically be in the middle of the value spectrum
To get value from any type of investment measure, you need to look at them in the context of everything else that’s going on, in the market and in individual stocks.
Most types of investment measures fall on a spectrum that ranges from suspiciously cheap to extraordinarily expensive.
So, it’s a mistake to focus—for instance—on stocks in the “suspiciously cheap” end of the p/e spectrum. It’s also a mistake to reject stocks out of hand, just because their relatively high p/e’s and other clues make them seem too expensive.
Most of the time investors will find their best opportunities in the middle of the spectrum, far from the extremes of cheap and expensive.
Take a broad view when looking for low risk investments and you will have better results
When we’re looking for the best investments to recommend in our newsletters and investment services, we start by putting all the important information we know about a company into perspective.
But things are never quite so simple, even with low risk investments. Your stock pick’s latest earnings may reflect unusually favourable or unfavourable conditions. This can make the company look safer or riskier than it really is. In addition, the company may put the funds it borrowed to immediate profitable use, increasing its earnings and its ability to pay interest. It may plan to sell assets to reduce debt, or cut costs to increase earnings.
In the end, there are many ways to try to put the facts about a company into perspective. None are perfect, since all involve a mental balancing act between high and low estimates, history and the future, and faith versus skepticism.
Our goal is to put the information in a form that lets us weed out the extremes—excessively overvalued stocks, or those that are suspiciously cheap. In the long run, investors make most of their profits in investments that offer good value and an attractive long-term outlook. That ensures a place for low risk investments.
Aim for a deal with cheap stocks to buy now and you leave yourself open to a double risk
Two-part investing exposes you to a double risk. Seemingly attractive stocks can drop for months, or even years, before a hidden flaw comes to the surface and explains their weakness.
For that matter, little-noticed stocks sometimes rise for months before the reason for their strength becomes apparent. In a lifetime of investing, you’ll choose both kinds of stocks.
If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range ….and they’ll keep on falling.
But you’ll never get to buy the other kind of stock—the kind that keeps going up. These stocks will always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.
There’s no easy answer to the buy-now-or-wait dilemma. At times it may pay to hold off—for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.
In the end, if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it slips into its next 5% to 10% setback, after all, it may first go up 50% to 100%.
Stick to our three-part Successful Investor strategy when considering cheap stocks to buy now
Invest mainly in well-established, dividend-paying companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
Some would say that the best cheap stocks to buy now are penny stocks, while others would say they are value stocks. Which would you put your money behind?
How do you find cheap stocks that look like they could be promising long-term investments?
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