Over the past two years, I've been developing a plan to beat Wall Street's unexceptional performance. Today, I unveil it.
As a Motley Fool employee, I have two pretty fantastic perks:
- I get 100% free access to The Motley Fool's annual subscription services, of which I get to pick and choose the best ideas from a plethora of outstanding sources.
- I have unparalleled access to future legends, such as Costco CEO Jim Sinegal and Liar's Poker author Michael Lewis, in addition to many others.
Two years ago, one of these future legends came to speak at Fool HQ. His name: Jack Fockler. His occupation: managing director and vice president at The Royce Funds, a highly Foolish small-cap value firm. In his talk, Fockler mentioned two simple words that I've been contemplating for the past 24 months, and I'm now ready to take action on them. We've all heard these words hundreds of times in our lifetime, but rarely in the same sentence.
In retrospect, it's so unquestionably logical to invest in this manner, but I've only recently put it together. I'm excited to share it with you. The bigwigs on Wall Street will never see us coming.
Those two words? Time arbitrage.
What it means
Arbitrage -- buying in one market and selling in another for a higher price -- is usually used in an investing context with regard to currency, interest rates, share class, or merger price discrepancy opportunities.
The concept of arbitrage in investing sounds great. With perfect execution, investors could literally generate risk-free profits by buying and immediately selling a security in a different market.
It's our time
If arbitrage is buying in one market and selling in another, then time arbitrage is the concept of buying a stock from those with a different time horizon, and selling on our own terms.
I am a strong believer in very long-term investing, which means my time horizon is enormous. I don't mind being wrong for two years as long as I'm right on the 20th year, which is how I now think about my investments.
In fact, I welcome it. Please, Wall Street! Sell off a great company because it missed your quarterly estimates or because some whiz kid analyst thinks the sector is out of favor. You need to window dress the next quarter, I need to fund my retirement in 20 years. I certainly like my odds, regardless of what you choose to do in the short term.
When it doesn't work
Simply buying a beaten-down stock and holding for a long time period is not enough. There are certainly some horrible companies out there that you should never buy, regardless of your time horizon. Typically, these are companies whose fundamental business has been disrupted or they've taken on insurmountable debt. Stay away from these value traps. Don't buy and hold them with even a glimmer of hope that they might appreciate.
Long-term stock picks
Now that you know how I think about the timeframe of my investments, let's dig into some beaten-down stocks to look for time arbitrage opportunities (and avoid the potential value traps).
1-Year Price Change (%)
|ATP Oil & Gas (Nasdaq: ATPG )||-29.2|
|YRC Worldwide (Nasdaq: YRCWD )||-95.5|
|Nucor (NYSE: NUE )||-17.8|
|NVIDIA (Nasdaq: NVDA )||-17.9|
Trucker YRC Worldwide is significantly down from its 52-week high thanks to its massive debt load, which creates a very real chance of bankruptcy. There has been some bright news for the company, but if you apply the question "Has the outlook for the company changed?" the answer is most assuredly "No." For me, that indicates I should keep my long-term cash far away.
Deepwater driller ATP Oil & Gas has also been beaten down, but I think there's opportunity here. Fellow Fool Toby Shute agrees, making ATP his top stock pick of 2010. Of course, a lot has changed since Toby's original recommendation, including the infamous BP (NYSE: BP ) and Transocean (NYSE: RIG ) Deepwater Horizon disaster, and the resulting imposition, then lifting, of a moratorium on deepwater drilling. With the recent monetization of the massive (and expensive) ATP Titan floating production facility, I would feel comfortable taking a long-term position in ATP.
For my two favorite stock picks, let's return to Motley Fool perk No. 1 from above. As a Motley Fool employee, I get to freely browse around our paid services and special reports. I'm proud to share two of my favorite ideas from these services.
First up is NVIDIA, a pick made by Fool co-founder David Gardner in Motley Fool Stock Advisor. Given that his average pick is up more than 100% since 2002, I generally listen when he makes a recommendation, especially when the stock is down and his thesis still holds. David strongly believes in NVIDIA's long-term prospects in both high-performance graphics and mobile devices. Fears about NVIDIA's ceding the low-end market are a mere distraction over the long term, which makes it a perfect time arbitrage opportunity.
Since Fool.com readers have been increasingly interested in dividend stocks, I carefully examined our market-beating service Motley Fool Stock Advisor to find the best beaten-down dividend stock in our universe.
After much debate, I settled on Nucor. I believe Wall Street's shortsightedness is overlooking this leading U.S. steelmaker. Over the past 12 months, the stock is down 13% versus the S&P's 8% gains.
I am confident of a time arbitrage opportunity here. At the beginning of 2010, the U.S. steel industry was operating at a mere 60% of its capacity. Nucor's stock was beaten down as a result, while its competitor United States Steel (NYSE: X ) has been relatively flat. It may make sense to sell Nucor if your time horizon is one year, but it makes no sense whatsoever if you believe steel will be an important part of U.S. construction in the long term. It also makes no sense to sell Nucor when you consider it has increased its dividend by an average 26.2% per year over the past 10 years, delivering compounded annual total returns of 21.3% to shareholders.
Add in the fact that Nucor has a rock-solid balance sheet, and you'll realize it has what it takes to survive the short term and prosper on the other side. If your timeline is more than five years you should not miss this opportunity by any means.
Want to share in my perk No. 1 to search for other time arbitrage opportunities? Click here to get immediate and free access to 13 High-Yielding Stocks to Buy Today. In it, we recommend the one dividend stock for the rest of your lifetime, as well as 12 other great companies. In addition to Nucor, I will be stalking all of these companies for time arbitrage opportunities for my personal portfolio.