Saturday, July 29, 2006

Ignoring the rear view mirror when investing

Just like you shouldn't invest in home-builders shares right now, I'd also suggest that you stay away from anything which depends mostly on new home construction for a bulk of its' revenues. Such is the life of an OSB maker right now. Two Canadian forest products companies holding two of the top five spots, globally, for return on capital in the industry, Ainsworth and Norbord, have seen their share prices continue to slide in the face of weakening US home sales.

However, just like the home-builders, you shouldn't invest in them when their PE ratios are absurdly low (like the 2.2 and 5.1 they are currently). Better to invest in them after several years of poor home sales, when the likelihood of an upswing in home construction would boost earnings significantly. Buying today, at today's prices (even though they've fallen significantly), is like driving using only a rear-view mirror.

Something to think about, and perhaps even put in your investment scrapbook to pull out in a few years from now.


The Confused Capitalist

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