Opportunities Await Patient Investors

01/06/2012 6:30 am EST

Focus: MARKETS

Marc Gerstein

Editor, Forbes Low-Priced Stock Report

There's no doubt last year was a tough year, but it's not time to give up or give in, writes Marc Gerstein of Forbes Low-Priced Stock Report.

The month ending December 15 was another dismal one for low-priced stocks, as Wall Street remained far more risk-averse than usual. The reasons have been much discussed and are well known by now: the US economy and politics, the Euro crisis, the Middle East, and most recently, North Korea.

Yet I’m actually starting to feel more comfortable about prospects for the US equity market, as well as the low-priced group. I’m not yet so bullish as to abandon my 10% hedge in Direxion Russell 3000 3X Bear ETF (TZA), but I’m moving in that direction.

As I discussed last month, I won’t wait until all is well with the world, because that’ll probably never happen. There are always problems.

And as to solutions, mediocrity is the best we can ever expect, given that society and the political arenas are perpetually populated by people of often extremely varying views, requiring solutions to reflect compromise and accommodation. All we need is a general sense we’re somehow adapting to the challenges we face, as opposed to being pulled downward with everything going you-know-where in a handbasket.

There are, of course, those who suggest we are in a hopeless downward spiral...and broadcast news producers do tend to find them quite telegenic. But anyone who sits down and calmly browses a bunch of economic indicators and data series (it almost don’t matter which ones you choose), it’s hard to avoid recognizing how much we’ve stabilized since 2008—and in many instances, how much improvement has already occurred.

We’re not where we want to be, and that’s to be expected given the severity of the 2008 blowups. But we are adapting to new sets of conditions and starting to move in the right direction.

You can even see that without looking at graphs. Notice leadership changes in Greece and Italy. Notice how the euro is still here, and how even Spain managed to sell some new debt at tolerable prices.

And notice how, despite a ridiculous amount of grandstanding, the US is still seen by global investors—if not a few S&P employees—as a safe haven, and how the government has not been shut down.

Again, things aren’t great. US elections, along with political struggles in Syria, Iran, and possibly Russia and North Korea are likely to keep journalists hopping for a while. But through it all, the world does not appear to be in the throes of a hopeless death spiral.

Finally, there are the stocks themselves. Yes, we get earnings disappointments and reductions in guidance every now and then, but that’s so even in the midst of powerful bull markets. More important, even the smallest and riskiest of companies, such as the ones we look at, are demonstrating quite a lot of survivability, and even the wherewithal to continue to build their businesses.

Moreover, their stocks are looking to be extremely bargain priced. I know, I know: to some extent you can say
this any time the market goes down. But lately, I’ve been seeing so much of it that it reminded me of the impressions I drew as I looked at stocks in 1982, and late 2002, and early 2009. I mean: There are bargains, and there are bargains.

I’m not sure exactly how the next market upturn will unfold. Algorithmic trading has become bigger in recent years, and the hot new thing now among the big guys is machine-readable news, which means computers, rather than humans, are making many current-events based investment decisions.

This may be why our stocks don’t track sudden surges in the Russell 2000 as closely and as instantaneously as history may have led us to expect (the machines are more likely to be programmed to buy the index than our kinds of stocks). But over time, the market adapts even to things like this.

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