When buying any stock, the name of the game is to buy low and sell high. Naturally when I say buy low and sell high I mean on a nominal basis. The whole point of investing is to buy a stock at $10 and sell at $20.
However, nominal profit is not always something that can be accomplished, because the market has a mind of its own and will not do our biding. In fact, the market is like the devil in disguise. It will try to trick us at every corner.
So investors have figured out that in order to buy low and sell high on a nominal basis, they have to find stocks that are cheap on a fundamental basis, and sell when they are either expensive or fully priced, on a fundamental basis.
If you do your homework right, over the long term - assuming you can take the volatility on the chin - you should be able to get that nominal appreciation, betting on a strategy of buying low priced stocks today and selling them higher when they become fully priced in the future.
However, why would anyone buy a stock with a low P/E today, that will have a much higher P/E next year? Does that make any sense?
In other words, what are your chances for future nominal appreciation, if you buy a cheap stock today, that will be a whole lot more expensive in the future? What hope do you have to pocket nominal appreciation?
My guess is that your chances are slim ...
In order to pull something like that off, you really have to be in a frantic bull market with no major correction. And because this game is based on making an educated guess (the more educated the better), this strategy in my book has very few chances for success.
But that's exactly what some investors are doing by buying certain housing stocks. Let's look at the table below:
12m possible gain
Toll Brothers (NYSE:TOL)
Standard Pacific (NYSE:SPF)
DR Horton (NYSE:DHI)
(all fundamental data from yahoo.com)
As you can see from the table above, these four housing stocks have a much lower P/E today than the 12 month forward P/E as estimated by analysts. At the same time however, all stocks also have a higher forward price target.
But the nominal appreciation you are hoping to achieve - buy holding on to these stocks for the next 12 months - is nothing to brag about.
Assuming analysts have it right, we get no major correction and an asteroid does not fall from the sky, the most you can hope to gain in the next twelve months if you buy Toll Brothers and hold it is 11.7%.
In my book these are not good odds for success in order to obtain nominal price appreciation.
Sell all the housing stocks above. And if you must be in housing (that I do not recommend) at least pick a stock that has a lower future P/E and not the opposite.