I want you to play a game with me, because I think playing it is useful right now for you to see the type of opportunity that might be coming in the markets.
Here is a stock I’d like to buy, but all I want to do is show you the chart and ask you one simple question.
Where would you buy it?
The stock started to trade in 2014 and had a great run and then crashed in 2020 with everything else, but after it bottomed it became one of the top performing stocks in the market, until it peaked last year. Now it’s falling really bad, dropping worse than the S&P 500 and even the Nasdaq.
Would you buy it now?
It went up Tuesday, but there is no way to know that this is the price bottom by looking at this chart.
Could it fall to the 2020 low?
Really one would be best to wait until the stock market bear market comes to an end before buying it.
As I wrote the other day, the real estate futures contracts are forecasting a slow down and slight dip in the real estate market towards the end of the first quarter of next year. That would suggest a recession is coming, if we are not already in one now.
Maybe the bear market won’t end until next year then.
That doesn’t mean the stock market has to go straight down from here.
It could decline a few more weeks and then rally into Labor Day or into October and then start down again.
There is no way to predict the exact path the stock market is going to take, but the real estate futures contracts suggest that the economy will have a recessionary trough in the first quarter of next year.
That’s next year, not this week, so there is no need to guess a bottom now in the stock market.
In other words, just let this stock drop more.
Maybe it could fall all year, who knows, but there is no reason to buy it today.
Now you can also look at fundamentals to try to look for a good value point to buy the stock.
That can give us an idea of the price point at which the stock will be cheap on a valuation basis.
The company is losing money at the moment, with a P/E of -6, but it’s earnings are projected by analysts to grow at 27% a year and they have a forward P/E of 9.07 on it.
More importantly, it’s currently trading at a P/S ratio of 1.01.
Investing guru Ken Fisher, in the past, got big by advocating to look for cheap stocks with P/S ratios of 0.50, considering 1.0 to be fairly valued.
The stock has a P/B ratio of 2.72.
If you think of the P/S ratio and look for 0.50 then you are looking at a share price of $23.00 as a good buy point.
The stock is unlikely to fall to its March 2020 low.
That happened with a total market crash.
But it could get to $23.00 or even below $20 if this bear market were to continue like this into the first quarter of next year.
Here is the thing.
I don’t need to buy the stock, because I have lots of long positions in commodities, mining stocks, and energy stocks and what are essentially hedges on them. I have enough long positions that I don’t need to do anything.
But, if stocks like this continue to fall to the point where they become truly cheap on a fundamental basis then there will be an incredible buying opportunity in them that cannot be passed up.
It’s not here this week, but it could come around the end of this year or in the first half of next year (probably the first quarter of 2023).
And there is nothing in this stock chart to suggest it won’t.
The stock is CZR – Caesars; and all the other casino stocks have similar charts.
And there are many stocks falling like this now, with no sign that they have put in a real bottom.
Bear markets create incredible buying opportunities when they come to an end in various stock sectors.
Bear market rallies – not so much, as all of the rallies so far this year have shown.
Trying to play them is a fool’s game and the bear market ends when the masses on Robinhood and Fidelity stop doing that and give up and sell instead and they aren’t close to doing that. Too many are still believing in the technobabble talk of people like Cathie Wood.
-Mike
