Many times we come across “cheap stocks”; stocks which are relatively unknown. These stocks do not attract extensive analysts’ coverage. As a result, investors desert those stocks as it may look less appealing. Leave alone the retail investor even the large institutional investors shun such stocks as they only consider investing when the stock is covered by minimum number of analysts.
However, unknown stocks can be rewarding if the investors are ready to be patient for longer period of time. It is highly likely that this so called “cheap stock” trading at low price may belong to company which has excellent fundamentals and has a great potential to grow in the near future. But on the other hand such stocks also has some drawbacks as peaking of such stocks may take a very long time testing the patience of the investor.
How to identify such stocks?
Hated stocks- Typically these are stocks which come under the category of those stocks which are disliked by analysts because such stocks have disappointed them in the past by missing estimates, or by some other disappointing result or decision by the company. As result such stocks are valued at considerably lower price than what they actually command. Still nobody wants to touch those shares which keep the demand of such stocks negligible. Smart investors should always be look out for such stocks. The biggest benefit of buying such stocks is these stocks are priced inappropriately and buying such stocks can reap huge rewards for smart investors as such stocks have enormous turnaround potential.
The misinterpreted/ misunderstood stock- Stocks come under this category when investors or analysts have wrong story about the company. Typically, these companies have had the management which was once disliked by the analysts or some divisions of a company were not appealing to analysts and investors. But what analyst and investors do not realize is the company now has a new management or it has spun-off its loss making divisions or units.
Often people fail to find out change in the company’s management structure or restructuring of business which creates a turnaround potential. If investors are ready to pay lot more attention to details and do the due diligence then they can gain a lot by investing in such companies. A little bit of knowledge can create winning situation for an investor without taking too much of risk.
Hyped yet cheap stocks- This is a very dangerous category simply because stocks appear cheap only because of overhype, overestimation and assumptions which are not realistic. In fact such stocks are not cheap but the overexcitement and the bullishness over some sector or stock makes stock look very cheap. This category is ideal for short sellers as the momentum is very quick which make such stocks from expensive to “too or ridiculously expensive”. The dotcom boom is the best example when all shares related internet based or ecommerce based companies’ rose exponentially giving huge profits to those investors who were smart enough to sell those stocks quickly.