Diversify your portfolio with 3 rising stocks

Look for good buys when the market is looking elsewhere.

Just as an investor may look at companies making new yearly highs for growth stocks on the move, looking at those that have hit yearly lows may also help you identify companies with strong fundamentals that are cyclically down, or have had one or a couple disappointing business reports.

The old saying “buy low, sell high” is what we strive for, but it shouldn’t be a bet that a stock can’t go any lower — they can…much lower. You need to know about the company even more to be able to see the value that the market can’t, or to uncover situation where the market hasn’t completely realised that a stock’s story has changed for the better.

McMillan Shakespeare (ASX: MMS) had a fall in share price in July from $18 to $8 from the market caused by the previous Labor government’s proposal to change Fringe Benefit Tax calculation method, which would have made its vehicle fleet management and salary packaging service see a large drop in earnings.

The legislative scare disappeared by the Liberal government winning the election, and now the share price is slowly recovering. For the brief period between July and September, earnings may be affected, but the reason for the sudden drop has passed, so getting back to regular work moves forward.

Real estate investment trust Westfield Retail Trust (ASX: WRT) holds the Westfield Group (ASX: WDC) portfolio of its shopping centres in Australia and New Zealand. The company has low gross gearing, and a book value of $3.42 a share, compared to its share price of around $3 currently.

As the economy improves, increased consumer spending will add to shopping centre sales and revenues in general, which the trust receives retail space rental income and investment returns from its portfolio.

The world’s largest scrap metal and electronics recycling company, Sims Metal Management (ASX: SGM), had asset write-downs of $1.12 billion over the past two years, which made very big net losses after tax, and its share price continued its downtrend from $26.80 set back in 2009.

Now that the balance sheet has been pared back to reflect current valuations, book value per share is now $9.44, slightly lower than its $9.90 share price. Although currently it has a price-to-earnings ratio of a fantastically high 118, analyst forecast consensus has earnings per share rising from 8.4 cents to $1.07, or 11.7 times over the next three years.

Foolish takeaway

Another well-known investing saying — Warren Buffett’s “Be fearful when others are greedy, and greedy when others are fearful” — sums up a value investor’s strategy. When disappointment, disinterest and fear in the market drive down prices, a cashed up investor can pick up good companies for 30%- 50% bargains.

You have to know what to buy, so that means diligently studying your favourite companies so that when such an opportunity arrives, you will recognise the great difference in value and price.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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