The worse things get, the better they become.
We hope you’ll excuse the cryptic opening to today’s article.
And don’t worry, we haven’t gone all ‘we’re glad the stock market is falling’. Nonsense.
No one wants to see stocks fall. However, when stocks do fall, that’s when it’s up to the canny investor to make the most of things.
That’s what we’re doing right now…
When we say ‘the worse things get the better they become’, we mean that when a stock takes a beating, there’s the opportunity to buy that stock at a much cheaper price.
Of course, that doesn’t necessarily mean you should rush in right away to buy the stock. If the stock has taken a beating, it’s usually for a reason.
Most of the time that beating is justified. But sometimes it’s not justified. Not often, but sometimes.
The best example we can still think of is the 2008 and 2009 market crash. We remember it well. A whole bunch of stocks took a beating.
But it also meant that good, profitable, and well run companies took a hit along with some of the most speculative stocks on the market.
That’s why, during and immediately after the crash, we started tipping what we called ‘Main Street’ stocks. Those were what we saw as the most resilient of companies.
The kind of companies that were boring household names. Companies that made things everyone used on a daily basis…but without really appreciating that they used them.
A great example at the time was a company that made kitchen products and women’s hair accessories. The company made a profit but had just gone through a rough patch. To our mind there seemed little chance the company would go bust. So we recommended that our readers buy it.
We were spot on. The stock gained 338% over the next six months.
But it wasn’t just the relatively low risk stocks that caught our attention back then. We also saw it as a great time to speculate on the Australian market’s riskiest stocks. At the time we called those stocks ‘Radioactive’ stocks.
It wasn’t that they were necessarily involved in the uranium mining industry; it was just that for most investors these stocks were too hot to handle.
We bring this up because the past few weeks have produced a number of stocks that could qualify as ‘Radioactive’ stocks today. Only this time, they aren’t small-cap stocks. We’re talking about blue chip stocks…
As we explained yesterday, the S&P/ASX 200 is down around 5% since the October peak.
The financials index has fallen even further. It’s down around 6%. That’s a pretty poor performance for any stock or index over a six-week period.
And yet it’s nothing compared to the stocks in the following chart:
The chart shows the three-month share price performance of Qantas [ASX: QAN], QBE Insurance [ASX: QBE], WorleyParsons [ASX: WOR], and Newcrest [ASX: NCM].
Three of them have dropped 30% in three months. One of them has fallen 45.8%. That one is Newcrest. And it’s that one which has gained the attention of Diggers and Drillers resource analyst Jason Stevenson.
But if you think that price drop looks bad, just bear in mind that barely two years ago Newcrest was a $44 stock. Today it’s just $6.99. That means it has fallen 84% from peak to what could be the trough.
Just remember, even though a stock has fallen by that much, it doesn’t mean you should buy it right away.
So, is Newcrest a buy today?
We’ll put it this way. We call stocks like Newcrest ‘roulette’ stocks.
We’re not much of a casino gambler…the games bore us too quickly. But have you ever sat at the roulette table and seen the same colour come up many times in a row?
We remember that happening the last time we went to the casino in Melbourne. The scoreboard at one of the tables showed that black had come up seven times in a row. What are the odds on that? It’s bound to be red next…only it wasn’t.
As we recall, red didn’t come up on that table for another four or five spins.
In the case of roulette, gamblers have to remember that the result of each spin is independent of the result of the previous spin. Each spin has roughly a 50/50 chance (ignoring the presence of zero and double zero) of falling on either red or black.
In the case of the stock market, just because a stock has fallen 30% doesn’t mean it can’t fall 40%…or 50%…or in Newcrest’s case, maybe it could fall 90% or more from peak to trough. That’s what makes it so dangerous to buy a stock as it’s falling.
That said, it seems ridiculous to think a big stock like Newcrest could fall so much without being a buying opportunity at some point. So we’ve asked Jason to keep his eye on it for Diggers and Drillers readers.
It’s now just a matter of weighing up the investment case to pick the best time to buy.
As we said at the top of this letter, the worse things get, the better they become. Things have certainly gotten worse for Newcrest, and they could get even worse still. But that also creates opportunity. Newcrest is a stock worth watching.
Cheers,
Kris+
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