Big winners in the stock market tempt buyers to jump in before they rise even more. The fundamentals are great and the story is exciting. There's even the whiff of undervaluation given pending developments. But if buyers jump in during a bear market, they will likely lose money. Bear markets will maul almost every stock, even the most undervalued. The best way of making money for congenital longs is to sit on one's hands until the bull comes moseying around again.
But one might exclaim that we are still in a bull market! Not according to stocks. Only the growth big caps have avoided bear market territory. And because they comprise so much of the big cap indices, those indices give the false impression that things aren't so bad. Only time will tell whether the big caps catch down to the rest of the market but for investment purposes we are in a bear market. Which means any prior winners bought because "they've gone down enough" will likely lose you money.
The sad history of Northstar Realty Finance stock illustrates why buying a winning stock in a bear market is a losing proposition.
For those not familiar with Northstar Realty Finance, the company is a diversified equity REIT with 85% of its assets in real property such as hotels, healthcare, net lease, manufactured housing, apartments, and private equity investments in real property. 15% of assets is in real estate debt. The allure of the real estate coupled with the company's undervaluation to its peers is what attracted investors to the stock in the years after the 2008 financial crisis, which had reduced Northstar's price to the low single digits. Those investors made out handsomely as the stock soared and profited some more from a spun out asset manager, which also soared. That dream of riches was stoked some more when the company announced a spin off of its European office real estate.
Alas, the stock price peaked soon after in 2015 and has descended as fast as it had risen, hitting a recent split and spinoff adjusted low of $10.21 and a yield of almost 30%. The descent was marked by howls of disbelief and outrage from bulls who continuously pointed out the stock's extreme undervaluation to its net asset value of $29. Of course they put their money where their mouths were and bought as it became more undervalued, thereby further impoverishing their profit and loss statement
Where had they gone wrong? The stock indeed was undervalued and might have attracted big buyers if it had not been for one important fact unnoticed by the bulls. It was no longer a bull market! Important indices such as small caps, transports, and high yield were in bear markets since 2015. Northstar stock peaked around the same time as high yield and has been falling in sympathy with that asset class.
The lesson from our examination of Northstar stock performance is simple, if not easy to apply. Don't buy any stock in a bear market, no matter how undervalued, unless for a quick trade. Wait for a bull market and you'll be buying a winning stock at the right time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.