The best investors find ways to buy shares in great businesses at bargain prices. The trouble is, this is often easier said than done.
The stock market’s mostly capable of recognising companies with unique strengths. But there are ways to find exceptions.
Crisis? What crisis?
One of the best times to buy stocks is when there’s a crisis. This doesn’t have to be across the entire market – a specific sector will do. When an industry’s under pressure, share prices often fall across the board. But the effect isn’t the same on every business.
Companies with the best balance sheets and the lowest unit costs fare better. In other words, the strong get stronger.
That’s not to say their share prices don’t go down – they do. But the net result is much less and much weaker competition. This is where I look for opportunities to buy quality shares at bargain prices. It can be risky, but I think it’s the best and easiest way.
That easy?
It sounds straightforward – look for chances to be greedy when others are fearful. But it’s not always as simple as it sounds. The tricky bit is that it’s hard to tell how long a cyclical downturn will last. And sometimes, they even look permanent.
That means buying stocks in these situations often involves people telling you you’re making a mistake. And that can be tough. There’s often a fine line between finding a bargain and making a mistake. But some situations are easier to assess than others.
Industries that are prone to ups and downs can be good places to look. Cyclical downturns can present opportunities to buy shares in outstanding businesses.
A quality company
In this spirit, one stock I’m buying is Molina Healthcare (NYSE:MOH). It’s a US Medicaid provider that’s down 66% from its highs.
Providers collect a fixed fee for arranging medical care for low-income individuals. And they have to spend 85% of that on treatments. This leaves 15% to cover expenses. But that means having lower operating costs is a huge advantage – and that’s what Molina has.
The firm’s focused model and centralised systems help keep costs down. And this is difficult for more diversified competitors to duplicate.
This is especially important when the industry’s under pressure, as it is right now. That’s why I see the discounted share price as a buying opportunity.
A buying opportunity?
Since Covid, a number of relatively inexpensive members have left the Medicaid scheme. That’s caused costs to rise for providers. In this situation, companies lose money across the board. But the ones with higher operating costs and weaker margins lose more.
Importantly though, Medicaid rates have to improve. They’re required to be actuarily sound and give providers a chance to make money. Investors are wary because they don’t know when this will happen. It may take time and Molina recently lowered its 2026 forecast.
This however, is just the kind of situation I like. I think it’s a high-quality company that’s trading at a discount and is worth a look.
The bottom line
A lot of investors think that cyclical companies are inevitably low-quality investments. In my view, that’s a huge mistake. Even in these industries, there are businesses with durable strengths. And the ups and downs lead to natural buying opportunities.
