The market is a dynamic beast. There’s no one perfect strategy. And the same move won’t work all the time, anyway.
That means the burden is on us to dig out different opportunities from whatever the world throws up.
The great news about this is that compelling investment ideas can come from literally anywhere.
I’m dead serious.
Take investment legend Peter Lynch as an example.
He wrote a lot about great products or services that he stumbled upon in his day-to-day life. That spurred him on to research the companies that sold them to great success.
My colleague, Callum Newman appreciates the vast array of opportunities found in small-cap stocks that don’t get anywhere near the level of attention of stocks like BHP, CBA and Telstra.
And other investors use ‘screeners’ that narrow down opportunities into a small group of stocks based on pre-defined characteristics.
Perhaps you have your own preferred method of generating investment ideas.
I always keep the following question in mind: Why will the market put more value on this asset in the future than it does right now?
Today, I’m going to share with you four compelling strategies you can employ on the stock market.
They are among the best when searching for companies that are ripe to move.
That’s dollars in your pocket when you get it right!
Keep this list handy the next time you’re considering deploying some money into the market.
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1. Spin offs
Occasionally, a large company with a diversified operation will sell-off a division within the company, becoming a stand alone business.
The appeal of these is they can often come to the market priced relatively cheaply because the parent company wants to make the divestment quickly.
If not that, there’s always the possibility that the business flourishes once it has a dedicated management team (instead of being underserved in a conglomerate).
Two recent examples of spin offs on the ASX are CYBG Plc [ASX:CYB] from big bank NAB and Domain Holdings [ASX:DHG] from Fairfax.
That’s not to say you should buy these two. These are only examples. Just keep an eye out for opportunities like this when they appear so you can assess the opportunity.
2. Takeover targets
If you see an industry or sector enjoying very strong growth, it’s not unreasonable to expect merger and acquisition to heat up.
This can happen as big players use their strong cash flows to buy up smaller operations.
Currently, the gold industry is a good example of this. For example, a major producer can buy up promising juniors with good exploration projects.
Some homework, good reasoning and a bit of luck, can take you to the most likely targets for this kind of offer.
For example, a company called Silver Lake Resources recently made a play for gold junior Egan Street Resources Ltd [ASX: EGA].
Just because a business goes through a bad patch, doesn’t mean it will stay that way forever. Companies can run into trouble for all sorts of reasons — a cyclical industry, a poor manager or a bad product launch.
The market can dump a stock when this happens because investors are impatient. That throws up finding cheap opportunities if you can find reasons for a turnaround.
This can take some homework, but could be very profitable if there’s a bounce back. Software company GetSwift Ltd [ASX:GSW] fell to an all time low of 15 cents this year due to a legal issue. It’s since risen back over 59 cents, and as high 73.
4. Unappreciated growth stories
Occasionally, you’ll find a stock with strong revenue growth or some other exciting factor that the majority investors aren’t aware of yet. That gives you a chance to take a position before the wider market catches on.
A good example from this year was Credible Labs Inc [ASX:CRD]. This fintech player was the biggest tech float of 2017, but the price spent over a year trending down. A little research showed the business was going gangbusters.
Once the market caught on, the stock rose 187% between February and August before a takeover offer from Fox Corporation.
This list is certainly not exhaustive. It’s just a taste of some of the things I look for.
Keep your eyes peeled for these investing setups, and pay great attention to any company that looks like it fits one of these situations.
Until next time,