Ever tried to catch a falling piano?
Of course you haven’t!
Doing so would constitute pure insanity.
So why would you buy shares of a stock in freefall?
The downward momentum of such a stock can be every bit as forceful as the aforementioned piano.
Nonetheless, people keep buying beleaguered stocks simply because they seem “cheap.”
Well, we’re throwing you a lifeline today.
If you MUST buy a market laggard, at least buy one of the stocks mentioned below (and pray)…
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This Retailer Is Far From Dead
The economy is growing substantially faster than in recent years. We saw real GDP growth of 3.1% in the second quarter of 2017 and 3.0% in the third quarter. Productivity growth is up, too.
It appears that President Trump has been effective at jumpstarting the U.S. economy.
Now the inevitable beneficiary of this accelerated growth will be retail. After all, no force of God or man can stop Americans from spending every penny of their income!
Indeed, the only thing that can stop the coming boom in retail is a recession, and there is no sign of that right now.
And if you’re looking for a downtrodden stock in the sector to scoop up, go with Macy’s (NYSE: M).
The stock is down 49% this year, which isn’t surprising. Retailers have been out of favor all year as more investors expect Amazon (NASDAQ: AMZN) to continue its path of total domination.
Maybe that will be the case in the long term, but I would not bet on it happening immediately. E-commerce sales in the second quarter of 2017 were only 8.9% of total retail sales after all. While brick-and-mortar retail sales were up 3.2% in the year to June 2017, substantially faster than inflation.
So physical stores are far from dead.
Now Macy’s is trading at only 8 times trailing earnings and 6.6 times forecast earnings. It therefore fulfills any definition of a value trap.
With that said, there’s nothing wrong with Macy’s as retailers go…
Earnings in the second quarter of 2017 were far in excess of those in the second quarter of 2016. So with economic growth improving — and retail sales rising faster — Macy’s can be expected to benefit.
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There’s just one snag: Like many companies, Macy’s has overleveraged itself with negative tangible net worth. So you don’t want to be stuck with shares when a recession hits.
Beaten-Down Sector to Stage Comeback
When it rains, it pours for insurance companies.
In the wake of the catastrophic hurricanes Harvey and Maria — which have already racked up tens of billions in damages — investors dumped insurers like a bad habit.
To be sure, the hurricanes will impact insurers’ bottom lines for years to come.
But the sell-off was way overdone, and many of these firms are trading at too steep a discount to ignore.
One such insurer is AmTrust Financial Services Inc. (NASDAQ: AFSI).
The company offers insurance and risk solutions in more than 70 countries around the world.
But despite its global reach, AmTrust has a market value of just $2.3 billion.
Over the last five years, the insurer has smoked its competition, boasting revenue growth of 35%, compared with 7% for the industry.
AmTrust trades at just 7 times forward earnings. That’s less than half of the S&P 500’s multiple (19) and a discount to the financial sector of 68%.
And earnings are expected to grow 47% — twice the growth rate of the S&P.
The insurer also sports a forward price-to-book ratio of 0.8 — a whopping 71% discount to their peers.
Best of all, the stock currently yields 5.7%, well above the S&P (1.9%).
At present, the stock’s consensus Wall Street one-year target price is $18.30 — implying upside of more than 50% from where shares presently trade.
Bottom line: Insurers have been hammered this hurricane season. But AmTrust is one of the best-value insurance stock plays in the small-cap market right now.
Not Worth the Risk
My applause, gentlemen.
You likely just saved our readers — the ones looking for “cheap” stocks — a bundle of money with those two recommendations.
Let me say again: Cheap stocks typically have problems that are causing them to trade for cheap.
So think of them as a trap, not a bargain.
Plus, with so many thriving companies to choose from — ones that expand earnings quarter in and quarter out — why bother yourself with a laggard?
Still, if you must, Macy’s and AmTrust are your best shots.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily