Who would turn away from the idea of buying bargain stocks right at the moment they have turned the corner? Discovering a hidden gem with a catalyst can lead to transformational stock returns. Many of the biggest stock market winners in any year begin their journey with low valuations, where something changes to trigger a revaluation.
Most investors love the idea, but often don’t have the stomach or the time to hunt for these kinds of shares. But the principles of this approach are time-worn and can be easier than you think to implement.
Whether you are a lazy investor with a few hours available per year, or an active trader seeking to be ahead of the pack, this guide will help you understand the elements of implementing the Trending (or Turnaround) Value approach.
Is this right for you?
Let’s be clear, this strategy is not without risk. When fishing in the bargain bucket of the market, there’s always the chance of picking a false positive. Stocks are often “cheap for a reason”.
While this is not the bargain-basement of “Deep Value” stocks, the cheaper end of the market is full of out-of-favour sectors and troubled business models. While the stock market is fairly efficient at valuing stocks on average, it’s prone to over-react on individual stocks. It must be stressed that a proportion of these types of shares do continue their decline. But the base rates are clear - trending value stocks, benefiting from change, beat the market.
The approach is often attractive to:
- Opportunistic, active traders who seek out bargains, but want to minimise the chance of buying Value Traps by ensuring there’s a new trend or catalyst in place.
- Cautious value investors who have a good grounding in the history of the returns to value & momentum stocks.
To be clear, this approach to investing is a dynamic strategy. It requires either active rebalancing periodically, or active selling when valuations recover. Value stocks only rarely become long-term Compounding Quality shares that should be bought and held forever.
You’ll also have to become comfortable owning names that you may never have heard of. For many investors, who seek comfort in household names or popular stocks, that’s too much to bear. But remember, as Sir John Templeton once said:
