True story: The other day, I (Brian) received an email with this as a subject line: "Buy these stocks and make money."
Of course, the email ended up touting a $0.04 penny stock with an unpronounceable name (it looked fake). Apparently, an "analyst" somewhere assigned a short-term "price target" of $1.10 to this stock.
We're liberally applying quotation marks here to reiterate the obvious absurdity of The Stock That Will Return 2,650% in One Month.
Back to real life
Ridiculous claims in the stock market are nothing new, of course, and ridiculous claims from analysts are especially old hat. (Just ask the analysts who pegged Countrywide Financial "outperform," with a $45 price target, in the fall of 2007.)
We'll even go so far as to advise you to fight -- violently, if necessary -- whatever urge you may have to click on the "analyst opinions" tab at Yahoo! Finance. While it may seem prudent to see what the "smart money" thinks of your stock, this page is one of the most dangerous places on the Internet -- truly NSFW, as the tech-savvy say. It's not even worth the five seconds it takes for your browser to load the page.
That's because (1) you get no context and (2) nearly every single stock -- surprise, surprise for an industry that makes money by persuading you to buy stocks -- is considered "undervalued." Here are a few notable examples:
| Company | Recent Price | Analyst Target Price (Mean) | Analyst Target Price (Low) |
|---|---|---|---|
| Symantec (Nasdaq: SYMC) | $15.09 | $19.88 | $16.00 |
| Akamai Technologies (Nasdaq: AKAM) | $16.20 | $23.79 | $17.00 |
| Steel Dynamics (Nasdaq: STLD) | $16.56 | $20.35 | $12.00 |
| Pfizer (NYSE: PFE) | $16.04 | $19.18 | $15.00 |
| AsiaInfo (Nasdaq: ASIA) | $19.75 | $21.01 | $18.00 |
| Yahoo! (Nasdaq: YHOO) | $14.57 | $17.72 | $12.00 |
Data from Yahoo! Finance.
While we see the merits of an investment in Pfizer, Yahoo!, and so forth, it's preposterous to assume that nearly every single one of our semirandom sampling of stocks is, on average, undervalued by some 20%.
Please.
But let's talk about you
You opened this article for the same reason Brian opened the email with the same headline: to see which stocks you should buy to make money.
After all, it is a good headline -- direct, relevant, practical, and it appears to offer applicable advice. And it plays to a core human emotion: the desire for a quick, easy buck.
Yet if it's a quick, easy buck you're after, there are no stocks you can buy to make money. At least, not reliably. And that, to bring us full circle, is the problem with sell-side analyst research. While these five- to 20-page reports can often provide useful insights, they're not reproduced on Yahoo! Finance. Instead, individual investors who won't pay up for premium research are left to divine meaning out of useless, optimistic, one-year price targets.
Again, don't bother.
Buy these stocks and make money
If you're willing to change your mind-set, however, then there are stocks you can buy to make money. These are stocks in companies that ...
- Have a sustainable competitive advantage, such as economies of scale, high switching costs, or network effects.
- Treat all of their constituents -- customers, employees, and shareholders -- as partners in the business.
- Are financially strong enough to take advantage of down economies like this one to expand market share, buy up valuable assets on the cheap, and enhance their competitive position.
And we'll add a new trait to that list amid this paralyzing downturn: exposure to multiple foreign markets, which provide diversification and the potential for faster growth.
One stock to make money
Of course, we'd be remiss, after promising so much in the headline, not to give you at least one stock idea straight from our Motley Fool Global Gains investing service, so here it is: America Movil.
This company is the dominant cellular provider in Mexico and one whose subscriber numbers have actually increased with new number portability (indicating a significant competitive advantage). It has also shown a willingness to repurchase shares and pay a dividend to shareholders. And it continues to grab market share in Mexico, Brazil, and elsewhere, given that it has a much stronger balance sheet than its competitors and has already established 3G networks in most of its markets.
The catch is that while America Movil looks like a promising long-term opportunity, we have no idea if it will make you a quick, easy buck. But if anyone tells you they can do that, they're lying.
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