With the broader markets off significantly from their highs, the Dow closing at 12,159.21 today, down from the 14,198 mark it hit in the fall, likewise the S & P off from its twelve-month high of 1,576, closing at 1,333.25, both declines in the 14-15% range, and the NASDAQ showing an 18% decline, at 2, 346.90 (52 week high 2,861.51), investors are trying to figure where markets will go next.
While 2007 saw the beginnings of trouble for the markets, first indicated by the subprime meltdown, an event that is still washing through the economy and stocks, professional investors and small retail investors alike are still trying to determine what the implications for investing in 2008 may be. While institutions invest in the market often using a combination of both technical and fundamental analysis, many small investors rely on value investing, attempting to purchase stocks at either below their perceived book values, or at a stock’s perceived discounted market price. So when the broad market averages have fallen as much as ten to fifteen percent, with some individual stocks off as much as 30-50%, value investors look to buy. The caveat as always is whether the plunge in stock prices is temporary, and whether there are sufficient fundamentals to strongly suggest whether these stocks will rebound when the markets do. Some stocks don’t readily bounce back; that is the value trap. A stock hitting bankruptcy would be the ultimate value trap.
Value investors are currently assessing the prospects in the housing and financial stocks, which have plunged on the effects of the subprime crisis, and lately retail stocks, which have felt the chill from the now reluctant consumers.
Some bargain hunters see candidates for a potential value play that would include Citigroup (C), the bellwether mega-financial, which was trading at 24.96, down 55% from its twelve month high of 55.55, due to its layer cake of successive write downs, its latest one an $18.1 billion chunk, with investors uncertain that it will be the last one.
There is obvious risk also in homebuilders, which have been smashed. One of the leaders, Pulte Homes (PHM) now trades at 9.70 a share, down from its high of 35.66. Earnings estimates for both groups continue to shrivel. In the retail sector, Kohl’s (KSS), one of the bigger names, is trading at 39.24, all the way down from 79.55 earlier in the last twelve months. Recession fears and consumers cutting their spending are projected to be center stage for the next few months. These are the very definitions of both risk and opportunity. Values or value traps? The age-old question for value investors.
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