A new, worrying narrative is popping up in the financial media…
In short, many so-called experts have started recommending “bottom fishing.”
Bottom-fishing is exactly what it sounds like. It’s the practice of buying supposedly cheap and beaten-up companies in hopes that they’ll turn around and lead you to profits.
But of course, it doesn’t always work. That’s why my mentor and Chaikin Analytics founder Marc Chaikin often describes this practice as “the most expensive sport in investing.”
The problem is, most of these folks don’t think they’re bottom-fishing. They believe great research is leading to these opportunities. In fact, a very dangerous trend is unfolding…
Investors are using technical analysis to justify buying “cheap” stocks.
But as we’ll cover today, an attractive technical setup isn’t enough reason to buy a stock…
In this case, I’m referring to a couple of things when I say technical analysis…
- Charts showing stocks at five-year lows (or other long-term lows)
- Charts showing stocks in “oversold” territory
Seeing one of these two things in a particular stock isn’t enough on its own.
After all, our Power Gauge system analyzes and weighs 20 different factors for a reason.
That’s especially true when it comes to making a “value” based decision. Remember, a low share price doesn’t make something “cheap.”
Something needs to signal a pending turnaround as well. And while I hate to say it, the reality is… the current signals are pointing in the wrong direction for most companies.
Before you go bottom-fishing, you need to keep a few things in mind…
Inflation is at a 40-year high with no indication of letting up soon. The cost of energy has come down a little bit recently, but prices for all types of other things haven’t.
U.S. gross domestic product (“GDP”) declined last quarter. And the latest estimates point to another decline this quarter. If GDP declines for two straight quarters, we’ll officially be in a recession.
And even though companies are reporting better-than-expected earnings recently, they’re still poor. As my colleague Pete Carmasino says… “Bad earnings are bad earnings, even if they’re less bad than expected.”
Even great companies struggle in this type of environment…
For example, input costs are soaring in the manufacturing space. Some companies are facing labor shortages. And others are facing parts shortages.
So when people try to say that the market can’t go much lower… ignore them.
Even if a great company’s stock is down 30%, it can still fall another 30%. And that’s especially true given the current state of the economy.
It doesn’t matter if a stock is at a five-year low, a 10-year low, or even an all-time low.
The bottom line is simple…
Share price alone doesn’t make a stock cheap. And wishing for a bottom doesn’t make it happen.
It takes more than just technicals to make this kind of evaluation. You need to be aware of the fundamentals, too.
For that type of research, I lean on the Power Gauge. The system evaluates the 20 most powerful factors on Wall Street. They’re the perfect mix of technical, fundamental, earnings, and expert-related indicators.
But whatever system or approach you use, make sure it’s more than just a variation of “I’m buying this because the price is a lot lower than it was a few months ago.”
In other words… don’t go bottom-fishing just because someone else told you to do it.
And definitely don’t go bottom-fishing just because a stock looks cheap on the chart.
That’s the most expensive sport in investing.