Tuesday, June 03, 2008

Why I'm Avoiding Beaten Down Stocks

With the recent stock market correction, there are lots of beaten down stocks, such as Pfizer (PFE), and Ford (F) and especially financial stocks including Citigroup (C), Bank of America (BAC) and many more. Buy GM by Vito Racanelli in Barron's recommends the auto maker General Motors (GM) as a potential triple in two years.

However, as attractive as the prices are for these well known stocks, I am resisting buying any of these shares, even the ones with 6-7% dividends, such as Pfizer and Bank of America. Here's why I'm not buying:
  • Down for business reasons. Many of the companies mentioned have low prices due to business issues, e.g. credit crisis, insufficient product pipeline, or poor execution. Unless the issues are corrected, these stocks won't likely do well, even if they historically were a solid stock.

  • Can go lower. Two weeks ago, I was surprised that Pfizer was priced around $20 dollars, a 9-1/2 year low, with a 6.4% dividend. I thought, "How much lower can it go?" and thought briefly about buying it, but did not. Well, today, the stock has been as low as $18.93.

  • There are other better options. Rather than buy stocks going down, I prefer to own stocks that are going up. Yes, there are still stock rising in this volatile market. Potash (POT), which has been on my buy list since May, 2007, is one great example. Potash is up 41% in 2008.

  • Of course, some of these companies will be able to solve their business issues and turnaround the stock price. However, I am happy to wait for a clear confirmation. If there is a turnaround, the stock will still be a good deal, 20, 50 or even 100% higher than today.

    Disclosure: As of the publication date, I own shares of Potash in my personal trading account. Pfizer, Citigroup, and Bank of America are owned in accounts managed by our financial advisor.

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    This is not financial or investment advice. Please consult a professional advisor.

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