Buying "Less Bad" Is Not an Investment Strategy

The new year has definitely started off on the right foot for most investors -- myself included. The Dow Jones Industrial Average is up 2% year-to-date and the financial sector appears to be righting itself, with Bank of America, currently the top-performing Dow component, up 23%.

Unfortunately, following earnings reports from Alcoa (NYS: AA) and a few others earlier this week, a malaise appears to have swept over the marketplace; it appears we're willing to welcome "less bad" results with open arms.

What I'd like to do is remind everyone that investing in a company because the results appear less bad than once predicted is not... I repeat, not... an investment strategy; it's investing suicide. Just because a company meets or beats lowered guidance or manages to exceed extremely subdued expectations doesn't mean there's cause for celebration.

A steal of a steel?
Let's look back at Alcoa. On Monday, the world's largest aluminum manufacturer slightly missed earnings estimates and forecast a moderate 7% bump in aluminum demand for 2012. What might seem like decent news at first really isn't if you dig a bit deeper. Demand weakness from the European sovereign debt crisis and soft aluminum pricing is likely to chase future Alcoa earnings estimates down even further. In fact, over the past week, the average analyst estimate on Yahoo! Finance has fallen from a full-year expectation of $0.87 to just $0.62.

Gross-er!
This turning a blind eye isn't just happening with Alcoa. SUPERVALU (NYS: SVU) has been a turnaround candidate for seemingly ever, yet it still can't get its act together. Although the grocer only missed analyst estimates by $0.01, it lowered its full-year revenue guidance by $400 million and cautioned that high food prices, picky consumers, and continued restructuring costs are likely to impact the stock for some time to come. Even with the company holding to its previous full-year EPS guidance, there's really no reason to be excited about owning the stock.

The roof is on fire
Lennar's (NYS: LEN) results in the homebuilding sector yesterday should also be taken with a grain of salt. Lennar recorded a 20% rise in orders and a 9% jump in deliveries and even saw a slight uptick in the selling price of its homes. Still, this is hardly a reason to run in the streets proclaiming an end to the housing sector's woes. The sector has faked Wall Street out on multiple occasions, and I'm leery of giving into any sort of strength in housing after just one report. Unemployment figures are at multiyear lows, but 8.5% is still incredibly high historically and another reason why buying into homebuilders now could be a fatal error.

Foolish roundup
We're not even through two full weeks of 2012 yet, and I've been able to locate three examples of "less-bad" results that could be unwittingly luring investors in. Keep your eyes peeled to overall sector trends and realize that just because a company meets or beats lowered expectations doesn't necessarily make that company or sector a good investment. Remember, "less bad" is still bad!

Have you ever fallen into the trap of buying into a company because the results were less bad than expected? Share your stories in the comments section below and consider adding Alcoa, SUPERVALU, and Lennar to your free and personalized watchlist so you can keep up on the latest news with each company.

Also, if you're looking for a great idea to start the new year off and don't want to worry about "less-bad" results, I invite you to download our latest special report, "3 Stocks That Will Help You Retire Rich." Why worry about timing a bottom when our analysts have done the research and located three tried-and-true winners. Best of all, this report is free for a limited time only, so don't miss out!

At the time this article was published Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. He's often imagined living in a Seinfeld-like bizarro world where everything is the complete opposite, but thinks it would just be too confusing. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of SUPERVALU and Bank of America. Motley Fool newsletter services have recommended buying calls in SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that deems the truth is never too much to ask for.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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