Cheap Stock, Cheap ETF to Consider

NEW YORK (TheStreet) -- From time to time, I rant about the dangerous allure of low-priced stocks as well as low-P/E stocks some investors like to label "value plays." All last year, as Research In Motion ( RIMM) was tanking, the stock's bulls rallied around it, arguing that it had become too "cheap." Fund manager Whitney Tilson made the same argument when he reversed course and went long Netflix ( NFLX). Here's a guy who nailed the bear case, but got shook out of his short position at the top, only to go long at a couple of bottoms. The least he could have done was take some profits on NFLX's most recent dead cat bounce.

RIMM and NFLX are not the only stocks that masquerade as value plays to burn investors. Radio Shack ( RSH), down 65% over the last year, is another excellent example. For some reason, when a stock trades below book value a whole host of investors decide it's time to buy. If you're buying a stock because you think it might sell patents and real estate or get bought out or taken private, hopefully you're doing it with a rich guy's speculative money.

If a stock tanks to below book value, consider that a red flag. Forget about quantitative metrics and dig into the company's business. Look at their strategic-competitive position. Determine if they have a logical vision of the future and their place in it. When the narrative is not worthy, it's often a clear signal that Wall Street has punished the stock for good reason. It has no future to speak of.

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Although the stock and ETF I consider in this article carry risks, they clearly qualify as value plays in the sane and logical sense of the word.

Natural Gas

The United States Natural Gas ETF ( UNG). There was an interesting article in The Wall Street Journal this past Friday that sums up a large part of my approach to investing:
In short, the news about natural gas is awful--exactly the type of conflagration that growth investors hate, but value investors love. "Everyone who has a brain should be thinking of how to make money on this in the longer term," the renowned investor Jeremy Grantham of GMO wrote recently.

While I am not necessarily a "value" investor -- you will not find me pouring into NFLX, RIMM and RSH -- I do appreciate a good bargain, particularly if I see a legitimate forest for the trees. And, as the Journal article explains, as bad as it seems now for natural gas, the future looks pretty bright. I could not agree more -- an oversupply of natural gas will make it the no-brainer, default choice to solve a whole host of energy problems. Why rely on oil to power daily life when you can cook with gas?

ETFs do not always make the greatest long-term plays, however, if you time it right, you can seize short-term gains in UNG.

The UNG May $15 put closed this past Friday's session at 44 cents with the ETF ending the session at $15.72. This was right around Robert's target price to cover and close the trade for close to a double. He will update what he did in this week's newsletter, which goes out to subscribers Tuesday morning.

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Even though it's an ETF, I am considering opening a small long position in UNG. I also plan to consider natural gas stocks to play the long-term upside I anticipate.


Time Warner ( TWX). Earlier this month, I wrote Why I am Long Time Warner. In it, I explained the position of strength the company operates from as digital media continues to transform traditional areas of the space such as cable television and movie distribution.

While I am not much of a P/E ratio guy, it's difficult to ignore TWX's forward P/E of roughly 10.5. The company reports earnings Wednesday morning before the bell. As a long-term investor, unless the company undergoes a sea change, I will use the aftermath of the event to add to my position one way or the other.

I buy the stock regularly several times a month. On a post-earnings pullback I will buy more. I am thinking about selling the TWX May $37 or $38 put early this week as a way generate income and maybe even get long on weakness.

TWX closed Friday's session at $38.09, just over $1.00 shy of its 52-week high. If the stock jumps after earnings expect it to retest that level, but proceed with caution.

Last quarter, Time Warner reported earnings on Feb. 8. It beat estimates on Harry Potter-related strength, increased its dividend and introduced a $4 billion share buyback program. That's the day the stock hit its 52-week high of $39.24. It traded as low as $37.90 after opening at $38.53. TWX ended the day down from the open, closing the session at $38.11. That renders it just about flat over the last three months.

As such, it might not be a great idea to jump too soon on strength. Wait for a natural pullback before opening a new position or consider doing it on a dip below $38.00 prior to earnings.
At the time of publication, the author was long TWX.