I was going through the news and came upon some articles that were indicating that the stock market is overvalued. To be brutally honest here, I don’t really care about market predictions, because the Dow Jones or S&P 500 reaching a certain target or not doesn’t really provide much value to me, unless I’m buying options betting on the movement of the indices. But it might be different for my readers, who might utilize these predictions more than I do.
These market predictions usually come in the form of news title that is sometimes tempting enough to sell your stock and store cash. That is the misconception many people have, that when the markets are overvalued, then everything seems to be overvalued, which is not true most of the time. When people are looking at markets to label them overvalued, they are usually just looking at the major indices such as Dow Jones or S&P 500. The problem is, these indices only represent 500 of the public companies in the US, which isn’t really capturing the entire picture. Even if the market is overvalued, I am quite sure that you will be able to find deals in the market.
When we are looking at stocks that are highly popular in the media, and have a large market cap, then it might be harder to find bargain deals, because since everyone knows about them, then most likely priced in the companies close to their intrinsic value. That doesn’t mean that markets won’t be irrational from time to time, such as when Apple stock went down 20% during the US-China trade dispute in 2019, or markets might undervalue or overvalue a popular stock. There is a reason Berkshire Hathaway has more than $100 billion in cash, because the deals available at that scale are not as cheap compared to deals available when Berkshire was managing less than $1 billion. But if you look at companies that do not have the same media attention, or lose their media hype, then they might be a good deal, based on their prices.
Many companies in the market cap range of below $10 billion provide some opportunities for investors to profit from. Sometimes investors will neglect a company that isn’t getting any coverage from analysts or major news outlet, and this can lead to stocks being undervalued (even overvalued) at times. For example, when Keith Gill (aka Roaring Kitty) invested in GameStop, his decision was based on the fact that there was too much negative sentiment against the company than it really deserves. Analysts tend to panic when revenues go down, but declining revenue is not always bad, as long as you invest at the right price. Before the short squeeze, many people neglected GameStop for years once its revenues started declining, as everyone was chasing Tesla or Apple. This provided a perfect asymmetric opportunity for Keith Gill. These opportunities were present at a time when everyone was panicking that stocks are overvalued. The simple conclusion you can make for now is that not all stocks are overvalued, even if the broad indices are. I can go on with a list of stocks that can fit this criterion, and yet the market is still overvalued for some experts. Yes, there will be times when even these cheap low cap stocks might get expensive, but for now there is opportunity.
Also, buying companies that are in a declining business is not a bad idea, as long as you figure out how to take advantage of the extreme negative sentiment in the markets. While this is one way to approach investing, it is important to remember that you should try finding more than one deals like these, as the future is uncertain and you cannot control the outcome of management decisions, which might end up destroying shareholder value. I know “Buy the Dip” has been a popular phrase lately, but you need to be realistic with your investments, as sometimes buying the dip isn’t always the ideal situation as well.