If The Bear Comes: Keep Calm!

The current stock market landscape is screaming troubles. More than just short term variations, we are talking about significant economic developments. The shockwaves from the plunge in the oil price might create a short term bear market or even a short term recession. In this case, one should remain undisturbed and keep searching for companies whose stock price was hit by the general market downturn.

Usually, during a market meltdown appear great opportunities. One reason is the fact that the really great companies are able to avoid economic downturns, however, during a market panic all companies suffer in terms of market quotations. One good example of this effect was Google’s ($GOOG) stock price, which traded around $700, in the end of 2007. In the 4th quarter of 2008 it shrunk to around $300, without any fundamental reason. The price has been in recovery since then. Google has kept its growth profile as it was visible then, and now the stock price is above the $1000 mark (after adjusting for the stock dividend). In Google’s case, the only thing that shrunk was the stock price, neither sales nor profits had any decrease during the most problematic period of the subprime crisis.

Opportunity

Photo credit: Srikrishna Narasimhan

There are other cases of fallen angels impacted by the economic downturn, we are talking about cyclical companies that reveal a dip in revenues and profits. These cases are more complex and usually more risky. One example here is the auto industry. At the depths of the crisis, almost every auto maker felt the impact of the crisis in its operations. Most of them saw its share price reduced to ashes, however, most of them recovered. Obviously the risk involved in this kind of investment approach is significantly higher since some auto producers went bankrupt. But the returns are also greater. One example is the Ford Motor Co ($F), the company traded around $1.43 during the 2008 panic, but since then recover to the point of being trading at around $14.76.

The moral of the story is: If the bear comes, keep calm and search for great opportunities!

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