Chasing red-hot stocks in search of outsized near-term gains is a dangerous game that many new investors should not seek to play. Instead, it makes more sense to invest one’s Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) funds for the extremely long haul. At the end of the day, beating markets on any given week or month is hard. It takes a lot of luck to do it, and unless you’ve got a crystal ball, you’ll probably find your efforts are better put towards finding shares of great businesses and buying them whenever their market values are considerably less than their intrinsic value.
Undoubtedly, finding dirt-cheap gems doesn’t have to be hard. However, the allure of quick profits in the face of a roaring bull market is hard if you don’t have discipline and the patience to wait for the perfect opportunities to come your way. Indeed, insisting on value can put you on the highway to wealth. And while it may be a lengthy one (more than a decade in most cases), it’s one that may have the least potholes in the road.
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Share price momentum and value are not mutually exclusive
Just because a stock has a great deal of upside momentum behind it doesn’t mean it’s overvalued, bubbly, and ready to implode like a paper bag.
Just like a fallen stock may not be an extraordinary value, given the deterioration of the fundamentals, headwinds, or something else, an overheated stock isn’t necessarily expensive. In fact, some top-performing stocks at or around all-time highs may be winners that have what it takes to continue winning, perhaps for many years to come.
In this piece, we’ll check out a hot stock that I still view as cheap relative to its long-term growth trajectory and some of its recent encouraging developments. Combined with lower interest rates (which are a boon for growth companies), I view the following name as a rising star that’s still within reach of investors seeking to land capital gains over many years.
Fairfax Financial: Cheap and still soaring
Consider shares of insurance and investment holding company Fairfax Financial Holdings (TSX:FFH), which has continued to find a way to extend its multi-year bull run.
Today, the stock is at a fresh all-time high, just shy of $1,700 per share. After soaring nearly 160% in the past two years, some of the more value-conscious among us may be inclined to wait for a crash or correction. After all, even a 50% plunge would still see the stock up in the past two years.
However, given the fundamental improvements behind the scenes (in insurance and the investments Fairfax has made over the years), I still view Fairfax as a cheap stock. Heck, it may even be more of a deep-value play, given its single-digit price-to-earnings (P/E) ratio.
Indeed, I’ve continued to pound the table on FFH stock on the way up over these past few years. And I’m not about to change my tune, at least not anytime soon. While it hurts to buy after such a sizeable run, I think that value investors have a lot to love about shares while they’re going for 8.1 times forward P/E.
The Foolish bottom line
Arguably, it’s far cheaper to bet on Fairfax and Prem Watsa (Canada’s Warren Buffett) than to bet on Berkshire Hathaway at current levels. As we head into a low-rate era, I’d look for Fairfax to continue making wise deals in the Canadian market, which I believe is full of bargains.
