Dear Cheap Investor,
It pays to be cheap.
That’s the mantra here at The Cheap Investor.
Now that you’ve joined up, it’s time to start seeing for yourself what Cheap Investing can do for your financial future.
In this report you’ll see everything you need to start investing cheaply today:
A Primer on The Cheap Investor Philosophy
The One Chart that Will Make You a Better Investor Instantly
Three Specific Ways to Invest Cheaply
Selling Stocks: Simple Ways to Book More Profits With Less Risk
A List Frequently Asked Questions
Before we begin with those though, I want to tell you why I continue to scour the stock market after 30 years of successfully doing it.
To be perfectly clear, there is nothing like finding a big winner in the stock market. It’s a rush. It makes you feel good. And, most importantly, doing so consistently can you give you the financial freedom to do anything you want.
The stock market has been very good to me over the years. And in The Cheap Investor I get the opportunity to show you, dear reader, how it’s done.
And my goal is to begin a long, enjoyable, and mutually beneficial relationship with all of The Cheap Investor readers.
So let’s get to it.
A Primer on Cheap Investing
There are countless examples of cheap stocks that were completely out of favor when The Cheap Investor system found them.
In the 30 years I’ve been researching winning investments, I can provide you with a few hundred examples.
Here are a few recent ones that really show you’ve what you’re about to get into and what makes a true Cheap stock.
To start with, here’s one that is not the most profitable, but is one of my favorites and really illustrates The Cheap Investor philosophy.
Back in the January 2012 issue of The Cheap Investor I described an opportunity opening up in shares of Nautilus (NLS):
Nautilus was a high flyer, selling at $18.53 in February 2007. Now that the stock has fallen 95% from that level, we think it’s time to take a look at this interesting company.
In the past we’ve been very successful recommending low-priced companies that have name recognition Nautilus’s brands include Nautilus , Bowflex, Schwinn and Universal are well-respected names in the fitness industry.
We think the stock has the potential to move at least 50 to 100% over the next year.
Nautilus shares were trading for $1.54 at the time.About 18 months later they hit a high of $9.87. Good for a total maximum gain of 541%.
That’s a bigger gain than many investors have ever had in their lives.
But we find them all the time. And it’s all because of The Cheap Investor way of analyzing stocks.
Take our recent venture into the ongoing biotech boom.
One great stock which has always on our watch list is Arena Pharmaceuticals (ARNA). The company is developing an anti-obesity drug. And the stock has moved like a yo-yo over the years. With swings as wide as up 300% and down 60% or more.
We watched and waited. Then waited some more.
But when it was was cheap enough, we made our move.
We wrote in the December 2011 issue of The Cheap Investor:
Arena Pharmaceuticals has been a profitable investment for our subscribers in the past. Recently, it’s been trading between $1.30 and $1.40 so we think it’s time to take another look at this stock.
I’m glad we did take at it again.
That month we recommended Arena its shares had fallen from as high as $8 to a new low of $1.37.
Overall, its shares were down more than 80%. The stock was the cheapest it had been in a long time. And as with most cheap stocks, it paid off well.
A little more than six months later Arena shares hit a high of $13.50. Good for a total maximum gain of 878%.
Finally, before we really get into the nuts and bolts of Cheap Investing and showing you how to really make the most of The Cheap Investor, there’s one more example that’s absolutely perfect.
Groupon (GRPN) has been a stock on a lot of investors’ radar.
The company’s ability to publicize discounts and special offers drove large volumes of new customers to businesses. It was power in numbers. It seemed like a win/win for everyone.
Nothing could stop it. Or so it seemed to Wall Street’s analysts.
The company has actually had more than its fair share of ups and downs since passing on a $6 billion takeover offer from Google and going public on its own.
The two firms covering Groupon during its IPO and initial run up to more than $30 per share both had a “Buy” rating on the stock.
Over the next year, however, Groupon shares went on to lose more than 90% of their value.
The decline from $30 to less than $3 per share signaled “something must be wrong” to the markets. But it was actually getting better.
In the December 2012 issue of The Cheap Investor I explained:
On November 9, the price plunged 30% in reaction to Groupon’s third quarter financial results.
What’s strange is the results were significantly better than they were a year ago, when the stock was over $30 per share.
We think smart investors should start accumulating the stock at this attractive level. If Groupon continues its growth trend, it has the potential to at least double over the next year or two.
The trend we saw forming had definitely continued. By the following summer Groupon proved it was growing strongly.
Shares jumped to a new high of more $11 per share.
That’s up 279% from The Cheap Investor’s recommended price of less than $3 per share. And it’s another great example of the benefits and profitability of cheap investing.
These are all examples of how powerful The Cheap Investor has been over the years.
Keep in mind though they all haven’t been massive winners. But when you invest cheaply, they don’t all have to be big winners to beat the market.
With The Cheap Investor system on our side we can beat the markets consistently whether we have a few 10-baggers (a stock that has gone up 10 times over) or not.
Here’s why.
The Cheap Investor Philosophy Explained
Note: The Cheap Investor philosophy is fully explained in my book, Big Money in Small Stocks. You can download it now from the member’s only section of the web site.
For 30 years I’ve been revising and honing The Cheap Investor philosophy into what it is today.
As you saw in the examples above, it has performed exceptionally well in the last few years.
As you’ll see soon, these kinds of opportunities we uncover are no fluke either. And it’s all because of the real foundation of Cheap Investing.
Simply put, when you buy cheap stocks, you get the perfect mix of risk and reward:
Risk – A stock hitting new lows has much less risk than a stock hitting new highs.
Markets are cyclical. They move up and down over many months and years. Within those markets you have different sectors. They are also cyclical and make broader swings in the overall markets. Within the different sectors you have many different individual stocks. They make wider swings than anything.
Cheap Investing is designed to take maximum advantage of those cycles.
By targeting the cheapest stock in an out-of-favor sector, we can eliminate much of the risk because the stock has already fallen so much.
Most Cheap Investor recommendations are stocks that have fallen 80%, 90% or more from their previous highs. And the risk of a stock that’s down 90% is far lower than a stock that’s up 90%.
Reward – The reason we take the risks (all investments do have some risk, successful investors just do what they can to minimize the risks) is because of the potential payoff can be more than worth it.
When you buy a stock that’s cheap, it’s the point where its risks are lowest and the potential rewards are the greatest.
The best example of this was in 2009 when many stocks were trading down 80% or 90% below their highs from a year ago. In the five years that followed many of these stocks returned to their past highs and beyond. Those that were down 90% returned more than 10 times over.
You will only find that kind of 1,000%+ capital appreciation potential in cheap stocks.
Cheap Investing is the epitome of contrarian investing.
I’m sure you’re asking yourself if the risk is least and reward the biggest, why doesn’t everybody buy cheap stocks?
The answer is found in how most investors make the moves they do.
The One Chart That Will Make You Rich
Most investors tend to do the exact opposite of Cheap Investing.
Quite frankly, it feels comfortable to buy a stock that has been going up. Most people want to feel comfortable or to go along with the crowd.
We’ve been taught there’s safety in numbers. It’s true almost everywhere except for the stock market.
It may feel good to do that, but it rarely pays good.
The chart below shows why that doesn’t work and the feelings most investors go through when they buy a stock:
It’s an absolutely perfect description. I know it. You know it. We’ve all been through it.
More importantly, the chart shows how Cheap Investing actually profits from the way most investors failures.
You see, since Cheap Investing looks for the point of maximum safety and reward potential, we by definition seek to buy stocks when most current shareholders are between “despondent” and “depression” in the chart.
Think about it like this. Most investors are buying big in the “Optimism” and “Excitement” periods. It’s easy. It’s fun. And usually for a few months there’s a lot of green on your brokerage statement.
However, there are a lot more risks in buying stocks in these periods. And when they turn, they will fall, fall some more, and continue to fall.
Most investors will hold throughout the fall. They refuse to take even a small loss even if it’s the best move to make.
Then when the stock they bought fell so much, they can’t take it anymore. They capitulate. And just dump the stock.
Then they do the same thing all over again.
This is the cycle that has made us a fortune over the years. And human nature isn’t going to change. So I expect years of profits ahead too.
Why?
Because we focus on essentially buying when most everyone is capitulating and selling out. When you see that, it tends to be the absolute bottom in a stock. It’s also where risk is lowest and capital appreciation potential is highest.
Most often these types of opportunities are found in one of the most little-watched, but most lucrative segments of the market.
That’s why The Cheap Investor specializes in small-cap stocks, turnaround opportunities and little-known companies trading for less than $5 per share.
Three Ways to Buy “Cheap”
As you can tell, Cheap Investing is not an easy thing to do.
Whether it’s finding a truly cheap stock or managing the emotions involved in buying a stock that’s so far down, it’s just not a natural thing to want to do.
However, I’ll ask you to keep in mind two things as a Cheap Investor.
First, the potential rewards of Cheap Investing are far greater than anything you’ve probably experienced before.
Even if you’re an experienced trader who has dealt with volatile stock options and other trading vehicles, over time buying cheap stocks and waiting for the market to realize the hidden value is the safest, most profitable form of investing. Not to mention the ability to rest easily when you are taking much less risk than most other investors.
Second, it does get easier over time. Many new Cheap Investors don’t follow the recommendations at first. They prefer to watch form the sidelines. That’s fine. Over time, you’ll see what’s happening, get comfortable with how it all works, and start joining in.
In a few years, you’ll probably be only buying cheap stocks and forgetting about stressing over where the markets are going next forever.
Now on to specific strategies on finding cheap stocks.
Again, more advanced explanations are in my book Big Money in Small Stocks which as a premium reader you can download a complimentary copy.
For now though, here are three of the most common ways we find cheap stocks:
Buying Cheap Stocks #1: Buy What Wall Street Hates
Wall Street analysts are simply awful at their jobs. And I’m trying to be nice by saying awful.
Brett Arends, who tracks the performance of analyst recommendations at the Wall Street Journal, has the proof.
His research found that between 2008 and 2012 investors could have made a fortune by doing a few simple things.
For example, had you bought the 10 stocks Wall Street rated the highest at the beginning of each year, you would have lost 11% per year.
If you bought an S&P 500 Index fund, you would have made a 9% annual return.
But if you bought the most hated stocks on Wall Street – the ones the analysts assign “Sell” ratings to – you would have made an average of 16% per each year.
Basically, you would have nearly doubled the return of the overall market and avoided some pretty hefty losses by just doing the exact opposite of what Wall Street recommended.
Those are just the averages though. It can be far more costly to those who follow Wall Street’s “experts” and far more profitable for those who do the opposite than most investors can imagine.
One of my favorite examples of how bad Wall Street analysts are at picking stocks comes from one of the most successful companies of the last five years.
I’m talking about Netflix (NASDAQ:NFLX). The company’s subscriber base grew from four million to more than 20 million between 2008 and 2012. The company and its stock performance over the last year reflect its great business model and strong customer loyalty.
But not everyone always saw the Netflix story playing out as well as it has.
Just look at Oppenheimer & Co., a 120 year old money management and analyst firm on Wall Street with more than $160 billion under management , to see how not to play a major growth story.
Oppenheimer’s research department initiated coverage on Netflix with a “Buy” rating in May 2009. The stock was $40 at the time.
Two months later Oppenheimer downgraded Netflix from a “Buy” to “Sell” when it was $42.
They gave investors a two-month 5% gain. That’s not bad. But what they missed out on was truly great.
Since Oppenheimer said “Sell” Netflix in July 2009, its shares went on to climb from $42 to $175 in the next 15 months. That’s a missed gain of 316%.
But the growing bull market in Netflix wasn’t something Oppenheimer was willing to miss out on. After Netflix shares quadrupled in the 15 months since they said “Sell,” Oppenheimer said “Buy.”
What happened next shouldn’t surprise you because you know how terrible these analysts can be.
Netflix shares fell, fell some more, and then fell some more. They ended up hitting a low of under $70 per share. Oppenheimer kept the “Buy” rating on Netflix the whole time.
In November 2012, with the stock down more than 60% from when they said “Buy,” Oppenheimer put a “Sell” rating on Netflix.
Netflix shares went on to more than double again to $175 after the “Sell” recommendation.
Here’s a chart showing all the action:
Tough to imagine worse timing right?
The only thing worse is the costs of following this “expert” analysis was staggeringly high.
An investor who followed Oppenheimer’s recommendations on Netflix would have lost 52% over this period.
If they would have simply bought and held Netflix would have gone for a volatile, yet profitable ride of 337%.
Anyone who would have done the opposite of what Oppenheimer said would have made 810%.
That’s the difference between turning a $5200 loss or a $91,000 gain on a $10,000 investment.
That’s a lot of money.
Rest assured Netflix isn’t the only example.
The same thing happened to steel stocks and mining stocks a decade ago. Most of which went on to rise 1,000% or more.
When we start looking to identify cheap stocks, we go start by going exactly where Wall Street tells us not to go.
Buying Cheap Stocks #2: Ride the Bull
Another way of profiting from cheap stocks is to ride a major bull market in a specific sector.
One sector that has produced gains as high as 2036% for Cheap Investors and will likely continue to do so is biotech stocks.
Every time the overall market has rallied throughout the past few decades, biotech investors have disproportionately benefited.
In fact, the last time the markets hit major new highs, investors in biotech could have made as much as 435% by just buying the entire sector. The cheap biotech stocks beat that 435% many times over.
Here’s what I mean.
You see, biotech stocks are known as one of the “riskiest” sectors in the world.
When most investors hear “biotech,” they think of stocks jumping 100% or falling 50% or more in a day after FDA trial results.
In other words, they hear biotech and think volatility and risk.
But as is typical with most investors’ thinking, it’s all wrong.
Just look at what happened over a decade ago when the markets were doing really well.
The chart below shows the S&P 500 (red line) compared to the NASDAQ Biotech Index (blue line) between 1997 and 2000:
Notice how biotech lagged behind the overall markets between 1997 and 1999.
Those two years, of course, were marked by two major crises – the Asian currency crisis and the Russian debt default.
Those were times when global economic events made investors apprehensive like they have been since the 2008 credit crisis.
But when markets showed their resiliency in 1999 biotech stocks caught up to the S&P 500 (green circle).
After that point biotech stocks absolutely soared. The entire NASDAQ Biotech Index jumped 435% in about 18 months after catching up to the S&P 500.
That’s the beauty of biotech stocks – they will soar at the right times.
When the markets are at or setting new all-time highs, biotech stocks will soar again.
The exact same situation which propelled biotech stocks more than 400% in the past is happening right now in biotech and why The Cheap Investor has been buying biotech stocks steadily since 2009.
The chart below shows biotech stocks have “caught up” once again with the S&P 500:
Since the markets bottomed in March 2009 investors have focused on large-cap stocks. Biotech stocks lagged behind.
That all changed in 2012. And just like last time biotech stocks “caught up,” they have significantly outpaced the overall markets ever since.
This is exactly what happened in 1999. It’s happening all over again. And 2013 and 2014 are set to be massive years for biotech stocks.
As you can tell by now, biotech stocks have the wind at their backs. And if history is any indicator, there are truly massive gains ahead.
We’re looking at average gains of more than 300% above the overall markets again for the entire sector. And you can bet there will be ample opportunity to beat that by focusing on the cheapest stocks in the biotech sector.
Biotech stocks have likely entered a bull market in 2013. The great way for Cheap Investors to get in is buy cheap biotech stocks and ride the wave.
Buying Cheap Stocks #3; Everyone Hates a Turnaround Story, We Love Them
One of the most popular value measurements for a stock is the price-to-earnings (PE) ratio. It’s calculated by dividing share price by earnings per share.
A stock with a low PE is cheap. A high PE stock is expensive.
Over the long run stocks with low PE ratios outperform those of high PE ratios.
But there’s so much more to Cheap Investing than just finding stocks with low PE ratios.
Here’s a great example of how to win by buying cheap stocks with high PE ratios.
The best time to buy commodity stocks is when their PE ratios are high because even though their stock prices are low, their earnings are extremely low giving them a high PE ratio. And the best time to buy them is when the companies are losing money.
Consider one of the most successful commodity stocks between 2011 and 2013 which was a very bad time to be in commodity stocks of any kind.
Back in 2011 the construction industry was barely recovering from the credit crisis, cement prices were down around the world, and shares of cement companies like Mexico’s CEMEX (NYSE:CX) were down too.
At the time CEMEX shares fell to a low below $3 per share, a 13-year low for the stock.
The problem was simple though. On top of the dreadful conditions in the cement industry, the company was also mired in debt.
At the bottom, CEMEX had a market cap of $3 billion and $17 billion debt. The mountain of debt was coming due too.
The markets panicked. CEMEX’s debt was downgraded to junk status. Its interest costs soared. And its earnings evaporated.
No one wanted CEMEX at all at the time. It was too “risky.”
As usual, that time turned out to be the best time to buy. CEMEX got its debt issues sorted out. Analysts are now forecasting healthy profits this quarter, next quarter, and for 2014. And its shares have risen more than 400%. Not bad for 20 months.
There are many others like it too. Look at uranium 10 years ago. Uranium hit a low of $7 per pound. Meanwhile, uranium miners were spending $20 per pound to mine it.
Uranium miners were losing a fortune, yet it was the best time to buy them. Uranium miners went up seemingly 1,000%+ across the board in the bubble which followed.
The same has been true for gold, oil, and other stocks over the last few years too. But you get the point.
The key to buying and profiting from turnaround stories in commodities is far different than buying just low PE stocks.
There are many more turnaround stories over the years in regular businesses unlike mining. The Cheap Investor track record is full of them. In the past readers had the chance to make as much as 2,419% on Carmax (KMX), 1,357% on AutoByTel (ABTL), 2,810% on PetSmart (PETM), and 541% on Nautilus (NUS) as you saw earlier in this report.
All of these companies were left for dead at one point. But as long as people were buying cars, feeding their pets, and working out, these stocks were full of potential.
Turnaround situations are great buying opportunities. The key to Cheap Investing successfully in turnaround stories is determining when to buy them and which ones will turn around the fastest.
Those are just three of the ways we find cheap stocks in any market.
They are all highly contrarian. They all are not easy to get into at the point when the market has left them for dead. But they all tend to work out. When they do, they pay off enormously well. And that’s the key.
Of course, buying the right stocks is only half the equation. The other half is selling.
When to Sell a Stock
Knowing when to sell a stock is just as important as when and what to buy.
Most investors, however, tend to spend most of their time searching for what to buy. They forget all about the selling side.
How many times have you gone into a new stock without a plan to sell? Or simply a plan to “sell when I’m rich.”
Don’t worry. We all have. The key is to not do that anymore and to have an exit strategy before going in.
In this section we’ll discuss two ways of determining when to sell a stock.
First though, I must make something absolutely clear.
Neither The Cheap Investor nor any of its employees are individual investment advisors. As a result, we cannot provide personalized financial advice. We cannot advise you on what specific actions to take and when to take them. That’s because we do not know your personal risk tolerance, position sizes, and whether any particular investment is suitable for you.
With that in mind, here are a couple of selling strategies which offer many advantages like lowering risk without sacrificing appreciation potential and automatic, emotion-free sell points.
Recommended Selling Strategy #1: How to Lose Small and Win Big on Every Trade
One of my long-time favorite selling strategies is one that has all the elements of a perfect investment strategy. It limits risk, gives a stock room to run up, eliminates emotional decision-making, and is one of the few ways to protect yourself from a market crash.
It’s a strategy I’ve been using at different times throughout the past few decades. And it always works. It’s called a trailing stop.
A trailing stop is an automatic sell order that is executed when a stock falls past a certain point below its previous high.
Basically, it forces a stock to be sold. No emotions. No fretting. It’s all automatic.
Here’s an example.
Let’s say you were a Cheap Investor reader in August 2010. ACADIA Pharmaceuticals (NASDAQ:ACAD) was a featured recommendation when it was $1.05 per share.
Since then, the biotech bull market and some positive fundamentals have driven the stock up to a high $13.51.
A 25% trailing stop order will automatically sell the stock if it drops to $10.13 from there without setting a new high.
The trailing would give you a worst-case minimum gain of 864%.
But if the stock continues to go up in the biotech bull market and doubles again, you’d still be holding it.
That would push your gains beyond 2,300% a 25% trailing stop would up the worst-case minimum gain of 1700%.
That’s the beauty of a trailing stop. It prevents losses from getting too big and still allows you to ride a rising stock for most of its run.
Of course, the trailing stop is not perfect. There are two drawbacks to them.
One drawback is they guarantee you will never make the perfect trade and sell at the exact top in a stock. That’s nearly impossible anyways. And, quite frankly, too many investors unnecessarily stress themselves over it anyways.
There’s also the risk that a volatile stock will get sold too early. If your trailing stop loss order doesn’t allow for the natural ups and downs in a volatile stock, it could be sold while the stock is still rising.
Those are all why we don’t always advocate using trailing stops.
Back in 2009 when stocks were very volatile and yet poised for a big rebound, trailing stops may have prevented you riding the current bull market for all it’s worth.
A lot has changed since 2009. The markets have more than doubled. The downside risks have more than double too.
But it’s also why the trailing stop strategy to use when markets are setting new highs and the risk of a market crash are greatest.
Again, a market crash will happen again. Whether it’s one year or five years out, no one knows. But we do know there is a lot of money to be made in the interim.
So we want to enjoy all the capital appreciation potential, but limit the risks posed by a market crash.
If and when a market crash does come, you’ll be “stopped out” of all stocks when they fall 25%.
There are no emotions involved. So no emotional mistakes.
Depending on your risk tolerance, you can use trailing stops from anywhere between 25% and 50%. And most online discount brokerages like Ameritrade and Etrade accept trailing stop orders.
On an additional note, when you use trailing stops, you’ll know to start looking for a major market bottom when you don’t own any stocks. And you’ll be safely on the sidelines for the market carnage that precedes that bottom.
Just imagine if you were stopped out of every position you had in March 2008?
That’s why trailing stops are perfect in a toppy market.
Recommended Selling Strategy #2: Playing With the House’s Money
The other way we recommend selling is unique to the way we invest as Cheap Investors.
Since we focus mainly on low-priced stocks that are extremely out of favor, have massive capital appreciation potential, and most every recommendation has a very real shot of going up between 50% to 150% in six to 18 months, we can use the “Playing with the House’s Money” selling strategy.
This strategy is pretty straightforward.
To execute it, all you have to do is sell half of a position when it has doubled in value.
For example, you would sell half your position in a stock that doubles after we recommend it.
This allows you get all of your initial capital out of the trade. And then after that it’s up to the market decide how much you make.
In this strategy, the best-case scenario is riding a 1,000% winner all the way to top. And since it’s all a gain, it’s a lot easier emotionally to let a winner ride.
The real benefit to this strategy though is in the worst-case scenario. If the stock drops as much 90% from the point it doubled, you will still have a gain.
In the end, just like buying cheap stocks, our goal in selling them is to find the right mix of risk and reward.
You must determine your own risk tolerance, time horizon, and talk to a licensed financial advisor to determine your own selling strategies.
These are two which have worked for us and our subscribers for years and years.
Let’s Get Started…
Now that you’re well on your way to enjoying the success of being a Cheap Investor, I recommend heading back to the web site www.thecheapinvestor.com and looking at everything available to you.
Also note that below I’ve included a lot of our most Frequently Asked Questions to get you answers to any questions you may have immediately.
If there’s anything else you’d like to know, drop me a line at support@thecheapinvestor.com and me and my staff will do what we can to help.
I respect and appreciate your business. And expect to exceed all of your expectations.
Here’s to a long and mutually beneficial relationship.
Yours in success,
Bill Mathews
Founder and Editor, The Cheap Investor