Sid Riggs: We hear Wall Street’s wizards pontificate, on and on, about the true value of a company all the time. They support their claims with a wide range of ratios.
Price-to-earnings, price-to-sales, price-to-book…
They reference operating margins, too. And book value. And return on equity…
The Street spends an enormous amount of energy trying to forecast a company’s intrinsic value – and with good reason. We’ve all been trained, through the success of legendary investors like Warren Buffett and Jim Rogers, to seek out value.
And I don’t disagree. I would much rather invest in a company that’s on sale rather than overpay for a pipe dream. But I’d prefer not to wait 40 years for my investment thesis to pay off.
That’s the major problem with simple “value” investing. Your favorite bargain stock may indeed be undervalued. But it can remain undervalued for a very long time before the market realizes your genius and pushes the price up.
To really leverage the power of value investing, we’re much better off aligning ourselves with a sector rotation…
Or something even more powerful…
Here’s How Industry Rotation Delivers 1,181% Returns
That doesn’t mean just investing in stocks from unloved industries in the hope that someday they will reverse and become darlings.
The trick is to get ahead of a tailwind that will drive an entire industry in the future.
Sometimes this takes a little courage, because it means stepping out ahead of the crowd – but when performed correctly it can lead to incredible gains – very quickly.
Case in point: Solar stocks, over the last 12 months.
Since November 2012, the solar industry, as a whole, has experienced one of the most powerful industry rotations in recent history.
Market Vectors Solar Energy (ETF) (NYSE Arca: KWT) has delivered gains in excess of 180% to astute investors in less than a year.
That’s a fantastic return for an ETF – but the gains of select, individual solar stocks have been nothing short of spectacular over the same time period.
Companies such as Canadian Solar Inc. (Nasdaq: CSIQ), SunPower Corporation (Nasdaq:SPWR), Trina Solar Limited (ADR) (NYSE: TSL), JinkoSolar Holding Co. Ltd (NYSE: JKS), and Yingli Green Energy Hold. Co. Ltd. (NYSE: YGE) have seen their shares explode 1,181%, 755%, 637%, 628%, and 420%, respectively, over the same time frame.
Those gains wouldn’t have been possible without the power of an entire industry rotation filling their sails.
But what led to the industry’s turnaround?
After years of oversupply in the solar market, prices collapsed. Add to that the global recession and fears that key European and Chinese end users might mothball clean energy projects and you have a recipe for an industry-wide bear market.
But all of those conditions were only temporary.
World leaders are embracing alternative energy sources, so the rebound in the solar industry was merely a waiting game for supply to be reduced, technology to improve, and the economies of key countries around the world to pull out of recession (or at least show signs of improvement).
All three of those are in place now. In the last year, investors have put more than $205 billion into clean energy projects, according to Bloomberg.
Voilà! An industry turnaround – and a gigantic industry rotation spark.
I could easily roll out similar examples for Internet stocks in 2002, oil service stocks in March 2009, and housing stocks in the summer of 2011 – but I think it’s more important to look ahead to where we might find the next industry rotation spark.
This “Hated” Asset Class Won’t Stay That Way for Long
Right now, there is one asset class so hated that even mentioning it causes investors to get queasy.
I’m talking about gold mining stocks – especially junior gold mining stocks.
As I write this, Market Vectors Gold Miners ETF (NYSE Arca: GDX) and Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) are down 62.79% and 78.86%, respectively, from their multi-year highs.