Just because you haven't heard of a company doesn't mean it's not a good investment.
In fact, it may be a better one for that reason.
Real Money Columnist Paul Price has spotted another of those companies that you probably don’t know but have definitely seen. And he argues there may be profits to be made on it.
In this case, the company makes installation products for homes and other spaces, such as countertops, cabinets and bathroom vanities. While their products sit on the shelves of Home Depot and are the shelves in many homes, there’s a good chance you’ve never seen their name and logo.
The company's called American Woodmark (AMWD) and Price likes it for a couple of reasons.
First, this is a solid business model. He thinks they sell a good product at a good quality for a good price. The second reason… that’s a little more unusual.
“AMWD shares are more volatile than most,” Price wrote recently on Real Money. “That makes it a great trading vehicle, which has produced excellent swings, wide enough to reap big gains simply by accumulating when it's cheap, and selling when it's on the expensive side.”
Yes, Price likes American Woodmark because the price goes down.
Here’s the thing to remember: A good company doesn’t always make for a good investment. When the market has accurately priced a strong company, and its shares of stock trade for a relatively high and consistent price, there’s not much room for an investor to make money. You’ll spend a lot to buy those shares, only to watch them grow by a few percentage points here and there. Investors make their money off growth, not necessarily stability.
Stability and efficient pricing are, in many ways, the enemy of profitable investing.
The real opportunities occur when the market has misjudged a stock’s price. When a good company dips, you can invest in anticipation of the recovery. When a bad company sells hot, more experienced investors can sell short.
When that happens frequently, you have a relatively volatile stock that can frequently reward careful, savvy investors. This has been Price’s experience with American Woodmark, a company which has had “four complete cycles” of dips and rallies since 2014.
“The declines averaged 57.6%, while lasting about 6.25-months on average," Price wrote. "Those plunges played out as quickly as one or two months, during the Covid-panic and from Christmas Eve 2018 through Feb. 15, 2019. They extended to 11-months on the other two occasions.
The four recoveries lasted much longer than the declines, averaging 13.75-months. More importantly, they generated average gains of 186.9%.”
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