The Coca-Cola Company (KO), Wal-Mart Stores, Inc. (WMT): Stock Pundits Are Drug Dealers, It’s Time for Portfolio Rehab!

Step 2: Only buy stocks that have a chance to drastically outperform the market

Is it just me, or is “safe stocks” a lot like saying “safe skydiving?” It’s a complete oxymoron, stocks are inherently dangerous, and the only thing that outweighs the risk is reward. So step two to your Rehab Portfolio should be to choose stocks that are either a). drastically undervalued, b). provide tremendous upside, or c). offer both.

In fact, the only safety you should be looking for can be answered in one question—will the company go out of business?

One stock that offers such upside, is Cliffs Natural Resources Inc (NYSE:CLF)

Cliff’s has been a perennial grower–with revenue growth of 22% annually over the past five years–but finds itself in the investment dog house. What’s funny is that over the past year, while the stock has slumped, revenue has grown even faster. In fact, the company actually made Fortune’s list of the fastest growth companies last year.

Analyst’s worries over costs and demand for iron ore have legitimacy. But if you’re looking only for stocks that can outperform the market, it’s hard to beat one that traded nearly three times higher this year, and it’s still growing.

Cliffs Natural Resources Inc (NYSE:CLF) just reported a nice earnings beat, $0.60 vs. expectations of $0.34. Again, there are concerns, cash has decreased and debt has increased while demand has waned. But if this recent quarter was a sign that the ship is stabilizing, there could be tremendous upside amidst a relatively flat market. The stock is still trading just above $20 per share and was at $100 a share not long ago.

The stock has been rebounding recently due to some of the positive factors previously mentioned, but it’s very volatile—so I’d wait for a slight pullback before rushing in.

The most important step to rehab: tuning out the noise

In 2009, after receiving enormous acclaim for “predicting” the crash of 2008 famed economist Nouriel “Dr. Doom” Roubini “predicted” that the bear market would continue for years.

Ditto for 2010, 2011, and 2012. In fact, throughout one of the greatest bull markets in history (2009-2012) this guy was a perma-bear, the only time he’s been bullish on stocks is, well, right now with the market at record highs.

But he didn’t lose speaking opportunities, even as you lost money from taking his advice. The same goes for Jim Cramer and all of the bulls of 2007 and 2008, they’re still solvent even though you may not be.

The point is that listening to these guys is hazardous to your financial health. Not because they don’t know what they’re talking about—they do—but because nobody can “predict” what the market will do next.

In fact, the most important lesson from the crash—and the rally that followed—is to tune out the noise and stay invested. If you would have just contributed, each month to a diversified index fund you would have outperformed the market by a mile. I strongly feel this, along with picking a few stocks that have multi-bagger potential, is the way to go.

But for this to really work, we need to give up the most powerful drug of all: trying to guess what will happen next.

It’s a thrill, but a costly one.

The article Stock Pundits Are Drug Dealers: It’s Time for Portfolio Rehab! originally appeared on Fool.com and is written by Adem Tahiri.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Bloodiest UFC Fights Ever Fought

Most Expensive Rum Brands in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!