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If it's Crazy but It Works, It's Probably a Worthy Investment Idea

If it's Crazy but It Works, It's Probably a Worthy Investment Idea

By    |   Thursday, 15 March 2018 04:44 PM

There are a lot of ways to go about investing. You can be as rational as you want, using as much financial data on a company or a stock’s chart to try and divine the future.

But one of the best ways I’ve found to make money is to share an idea with someone—and be told that I’m crazy for even thinking about it.

After all, if the average person thinks that I’m being crazy, then I’m probably on the right track. The average investor underperforms the stock market average. I want to outperform. So I not only need to invest differently to do so, I need to look at trades in a contrarian way.

Investors in a crowded trade will see poor results going forward (although they might be pretty good for someone who got in early). Today’s crowded trades were likely once trades that were once lonesome ones. And, someday, today’s crowded trades may see a rush for the exit, leaving only a handful left (and likely sitting on losses).

There’s always a “crazy” trade out there. Unlike a traditional contrarian opportunity, the truly crazy trades are the ones that involve much more than just decent valuation. They tend to involve a series of news articles on the company involved, analysts pining over the company’s former glory days on the inevitable road to bankruptcy.

Another characteristic is a share price drop of at least 50 percent. Against the market’s current bullish backdrop, that kind of move does suggest caution for most investors—but a closer look for those who want to beat the market going forward.

But those crazy trades have a way of turning around. Sometimes, it can happen blindingly fast too.

For instance, in early 2016, I was a buyer in Seagate Technology (STX). The hard drive manufacturer was dealing with some poor earnings numbers, and some stories were starting to come out about the inevitable and inexorable decline of hard drive manufacturing. Shares had dropped over 60 percent from their highs, from the mid-$60 range to around $22, with no end seemingly in sight.

But the end of the selloff was in sight. Following such a huge drop in share price that far outstripped the company’s modest decline in revenue, shares reached a double-digit dividend yield that was still covered amply by earnings. And with expectations for the company set so low as a result of some short-term panic, the company immediately surprised to the upside with its next earnings report just 90 days later.

Today shares trade around $60, and the opportunity to buy a huge yield has gone. What’s more, shares now have an optimistic outlook by analysts thanks to the company’s involvement in the now-hot sector of cryptocurrency mining.

The point is, these stories abound. It doesn’t even have to be stocks, either. Gold and oil languished in the late 1990’s and hit multi-decade lows in the early 2000’s. Amidst the backdrop of the booming technology sector, these commodities seemed like yesterday’s news. Yet gold went to rally from a low of around $250 to $1,900, and today trades around $1,300. Oil went from $10 per barrel to around $60 today, with a few trips over $100 per barrel as well. The news events surrounding those lows stands in huge contrast to the events surrounding their highs.

The point is, there are trades everywhere that can lead to outsized returns. You just need to find the trade that sounds crazy at first—even if it sounds crazy to you.

That brings us to today.

What looks crazy?

Well, call me crazy, but after a double-digit selloff in the space year-to-date, real estate investment trusts (REITs) are starting to look relatively attractive in this market.

I know, I know. I’m crazy. After all, we’re going to see interest rates soar this year! In fact, the market has already priced in 4 moves by the Federal Reserve. I think we’ll be lucky to see three, depending on how events unfold. So I don’t see interest rates impacting REITs as much as the market does right now. Yes, the era of cheap borrowing was great, but many REITs are perfectly capable of making it on their own.

Thanks to this selloff, we can get some of the best yields in years in the space. While they might go lower, that could just be a further buying opportunity.

One key metric for this sector is price to book value. In real estate, book value tends to be the price that a property was acquired for. For many REITs, years of appreciation won’t be reflected in book value. So it’s less of an interest-rate related yield play and more of an undervalued asset in plain sight play.

One REIT that I’ve been quietly picking up that’s trading at a slight discount to book value right now is Select Income REIT (SIR). They’re trading at a 15 percent discount to book, and currently yield over 11 percent. Not too shabby, even if REITs continue to trade out of favor.

REITs aren’t everyone’s cup of tea. That’s okay too. The craziest potential investment to me right now is in General Electric (GE). After all, it’s going to bankruptcy—at least that’s what everyone says. And after sliding 50 percent last year, slashing the dividend, and falling even more in 2018 so far, it’s certainly a powerful argument at work.

But I think the worst is over. The company is deleveraging, and more importantly, streamlining. They’re selling off divisions that never should have been under the GE umbrella in the first place. And based on all the parts of the company, they’re likely undervalued substantially. Current management is making painful moves to put the company on the path to sustainability in contrast to prior management’s philosophy of growing at any cost. That could pay off handsomely compared to the overall market in the years ahead.

But I know—it’s crazy.

But you know what? If it’s crazy and it works, you make money. And someone who’s crazy but has money isn’t crazy. They’re good investors. Or, if you prefer, just eccentric. Consider making some more eccentric trades in your portfolio.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

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There are a lot of ways to go about investing. You can be as rational as you want, using as much financial data on a company or a stock's chart to try and divine the future. But one of the best ways I've found to make money is to share an idea with someone-and be told that...
investment, invest, investing, investor
Thursday, 15 March 2018 04:44 PM
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