Tags: Packer | gold | coal | real

Ignore the Fear and Buy These 3 Unloved Assets

By    |   Tuesday, 21 August 2012 08:49 AM

Conventional investment wisdom is to buy low and sell high. But that can be a bit misleading. A lot of things get cheap on the way to becoming worthless. What really matters is investing in assets that are cheap because they’re out of style — and that will soon cycle back to popularity.

Indeed, it’s always been one of my core investment beliefs that you make your money when you buy, not when you sell. Avoiding overpriced assets that are beloved by the markets and buying undervalued companies and industries that the market fears is a simple way to invest for long-term results.

With stocks rallying to new highs, a few assets have managed to perform poorly in this market. Three, in particular, are worthwhile buys now:

1) Coal. Many coal stocks are more than 70 percent off their 52-week highs. That’s to be expected. Coal is a hated asset right now, as abundant, cheap natural gas is stealing the spotlight from this asset.

But for the United States, which has the largest coal reserves in the world, the ability to export coal to fast-growing countries like China is a long-term asset. In this area, take a look at Arch Coal (ACI) or Alpha Natural Resources (ANR). Avoid the bankrupt Patriot Coal (PCXCQ).

2) Gold Stocks. Historically, gold companies have traded at a premium to the overall stock market. But right now, they trade at a huge discount. Major mining companies like Newmont Mining (NEM) and Barrick Gold (ABX) trade with earnings multiples in the single digits, about half of the overall stock market.

With gold bullion flat for the year, gold mining stocks offer the best possible upside when the metal’s long-term rally resumes. Best of all, you can get paid to wait with modest dividends.

3) Real Estate. While real estate investment trusts (REITs) remain high, single-family homes may be finally near their bottom in many major markets. More importantly, ultra-low interest rates favor borrowers like never before.

Already own a home? Buy a rental property. Make sure that the rent can cover the mortgage, taxes insurance and repairs. It’s a lot harder to go broke in real estate when you bring in more money than you spend. Indeed, generating positive cash flow from the start makes real estate a particularly lucrative asset at today’s prices, although it’ll require more work than buying stocks.

Can any of these unloved assets stay out of favor or even fall further? Of course. But at today’s prevailing prices, there’s more upside than downside for patient investors.

One asset class that didn’t make the list is the “Web 2.0” stocks like Zynga (ZNGA) and Facebook (FB). While they’ve recently gone from being loved to hated, but there’s still more danger ahead for these overpriced stocks. Buyer beware.

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Tuesday, 21 August 2012 08:49 AM
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