Make Money Investing The Warren Buffett Way
I have the learned the hard way that just because a stock is cheap does not mean it is a good investment. It can be tough sometimes to distinguish between a value play and a value trap. Value plays are stocks that are trading below their true value and will eventually reach this value. Value traps meanwhile are companies that appear to be trading cheaply but are trading at their current level for good reasons.
Here are 3 stocks that have been cheap for a long long time.
It’s always important for value investors to be able to tell the difference between a value stock and a value trap. Value stocks are stocks that are trading below their true intrinsic value. These stocks are sometimes unfairly beaten down due to market events. Value traps are stocks that look like good investment opportunities and may appear to be cheap but really are not. Value traps deserve to trade at low prices. A value stock is a good company trading at a distressed price. A value trap is a distressed company trading at its proper price.
Value Stock or Value Trap?
Take Research in Motion for example. Research in Motion (RIMM) trades at $52 a share as shares plunged over 10% after releasing subpar earnings Thursday. Sales and subscribers slightly underperformed Wall Street expectations. Research in Motion continues to lose market share to the iPhone and Android phones. Analysts have been rushing to downgrade the stock hitting it with sell ratings. Research in Motion is a stock that is close to becoming a value play. If investors get an opportunity to buy shares in the 40’s, that would be a solid purchase.
Despite all of the negativity over Research in Motion, the company is still adding subscribers. The company is still growing just at a slower rate. 2011’s EPS is expected to come in at $5.90. Research in Motion is cash rich with $1.5 billion in cash and no long term debt. The company has even started buying back 3% of the outstanding shares. The key for RIMM is its new Blackberry phone. Will its new Blackberry phone be able to take market share from the Google’s and Apple’s of the way? Analysts believe that will all depend on how successful RIMM’s new apps and browser is.
My Take
I have to admit there is some risk in buying RIMM but the opportunity to buy a solid tech company trading at just 7.5 times earnings would be attractive to me in the mid 40’s.
Do you think that Research in Motion is a value stock or a value trap?
This is a list of stocks that I am watching because the prices appear to be good values. I have no position long or short in any of these companies.
1. Verizon (VZ)- Verizon is purely a dividend play for 2010. Growth will be tepid this year as the company’s landline business is shrinking. The growth for Verizon won’t come until 2011 when the telecommunications company is rumored to be adding Apple’s popular iPhone to its product offerings. According to the Wall Street Journal, “only 26% of the company’s annual-subscriber (retail) wireless customers held smartphonesor multimedia devices.” There is tremendous growth potential in selling smartphones and data plans to these customers.
2. Exxon Mobil (XOM) -At $64 a share the oil giant is falling into buy territory. The oil bubble seems to have burst but with global economies recovering oil demand should be on the rise. The recent acquisition of XTO gives Exxon more exposure to the natural gas sector. With the recent market drop investors will flock to solid large cap names with strong balance sheets like Exxon.
3. Goldman Sachs (GS) – I have learned from past experience to never bet against Goldman Sachs. Wall Street is expecting Goldman Sachs to earn anywhere from 17.50-18.75 per share for the current year which means the best investment bank in the world is selling for just 8 to 8.5 times 2010 earnings.
4. Apple (AAPL)- There may be a little more downside in Apple but not too much more. Shares have been punished relatively quickly. The stock has cooled dramatically from the $215 level just 10 days ago. The stock was due for a pullback sometime and maybe the market’s lukewarm response to the iPad was the reasoning. Either way shares look like a decent buy in the 180′s.
