The first quarter earnings reports that have been released so far in the United States are not off to a roaring start. We have seen two large banks and one of the largest technology companies each disappoint with respect to their quarterly reports. Are analyst expectations getting too high? Are these companies beginning to slow down due to recent geopolitical issues and higher inflation costs that have affected many areas of the world?
Many, including myself, believe the first quarter results will still be good. I think investors need to look at the results and keep in mind everything these companies have had to overcome to reap the profits they are currently reporting, and I’m not so sure analysts and investors are taking this into consideration. Even though the first few companies that to report have missed expectations slightly, their stock prices in some cases have fallen tremendously. Shares of Google dropped about $45 per share, or roughly 7.5 per cent, the day after they reported their earnings, a drop in value that is not warranted, in my opinion.
However, as an investor, one might expect this sort of thing to happen. We have seen a tremendous run up in many stocks over the past year and a half. So if companies were to miss analysts expectations, the fall could be just as fast or faster than the rise has been. Companies that have done well for a long time tend to become a victim of their own success, since they can only keep up this high rate of growth for so long. Eventually they will miss expectations (even if slightly) and a sell-off will occur.
Therefore, with this kind of reasoning in mind, what types of stocks should investors buy or stay away from? It seems the only stocks rising in price these days are ones with already high valuations. Companies in the oil and precious metals sectors, for example, are ones that continue to move higher, yet are they the types of companies to purchase today? Perhaps these companies will be the next to fall victim to their own success.
The price of precious metals such as gold cannot go up forever. What about oil? Do we want to own oil companies at $110 per barrel? If you don’t buy the shares of these companies, what can you buy? It seems like certain companies that are trading at historically low levels are being overlooked. Do we want to own companies such as Hewlett Packard, Microsoft, Sunlife and British Petroleum that are trading at very low levels, such that it may take a little while before investors realize their value before they rise? In my opinion, this is the dilemma for investors today. Do you chase the high flyers or do you purchase the inexpensive stocks that may take longer to rise.?
In my opinion, I believe investors should consider owning some of the underappreciated stocks which at some point will regain their shine and rise to the top. I believe a patient investor is a wise investor and thus purchasing something that is cheap where you can assess the downside risks of ownership is a lot less volatile and risky, and you will still make money in the long run. Regardless of geopolitical risk or inflationary pressures, the shares of good companies will eventually rise again. Investors do not have to chase the hot sectors of the market to find growth. They should stay diversified and maintain their discipline and they will continue to make money even in this volatile environment.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.