Overheated Stock Market Buying Tip: Buy On Bad News

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By Jacob Maslow

Bull and bear statuesWe are living in really unusual times as far as market valuations are concerned. Thanks to all the cheap money flowing through equities markets both here and abroad, it is not uncommon to see otherwise weak companies valued in the billions of dollars. If you need proof of this, just look up the stock price of Twitter (NYSE:TWTR), a company that is not making any profits, and you will know exactly what I mean. If that is the case with otherwise low to no profit companies like Twitter, the overvaluation is much much worse with solid companies. These are companies that are making profits.

The truth is that we live in an overheated and overvalued stock market. It is getting harder and harder to find good value. You have all these hedge funds and big money investors circling around like vultures, ready to sweep down on any company with any hint of upward stock mobility. That is how competitive the market is. It is no surprise then that a lot of experienced investors have completely turned their backs on the US stock market and are looking towards Russia, Spain, parts of Europe, and emerging markets. Be that as it may, if you want your investment dollars to stay in the good old USA, here is one piece of investment advice: buy on bad news.

There are many companies that are otherwise solid in terms of profitability, market leadership, and sales trajectory that are going through a bad news cycle. Maybe it can take the form of a drug that didn’t get approved by the FDA. Maybe it can take the form of a major supplier having issues. Or it can take the form of a product recall like the recent case of Kraft macaroni and cheese. Whatever form it takes, bad news is a good cue for you to buy temporarily depressed stocks of otherwise solid companies.

With that said, don’t feel that you have to rush out there and stock up on the shares of Lumber Liquidators. That is still too close to call. I am still waiting for the dust to settle on that drama. However, if things work out to the favor of the company, that is a solid buy.+

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