High-risk deals not necessarily bad
High-risk investors have been taking advantage of subprime by buying damaged shares. Now, regular money managers are starting to dabble, too. Sam Eaton reports so-called "bottom-feeding" can yield big returns.
A New York Stock Exchange stock specialist. (Stan Honda/AFP/Getty Images)
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Doug Krizner: The subprime crisis is at the root of much of what is being played out in the markets. Stocks in many companies have been badly damaged. And for weeks, high-risk investors have been swooping down like vultures to snap up some of these shares. And as Sam Eaton reports, regular money managers, like the ones running your mutual funds, have started nibbling.
Sam Eaton: They call it bottom-feeding. But it's not necessarily a bad thing.
Francois Trahan is chief investment strategist at ISI Group in New York. He says buying stocks that have been unfairly punished can yield some of the highest returns.
Francois Trahan: So if you have something that's been halved, you know, your odds of finding something that's going to double are much greater than if you're, you know . . . have something that did OK last year -- but probably has a story that's running long in the tooth at this point.
The financial sector looks especially tasty. Led by foreign government-linked funds, investors snapped up billions of dollars in financial stocks last quarter.
But Trahan says the sector will remain a risky bet until the subprime crisis plays out. He says the real bargains are stocks linked to consumer spending, like retailers and restaurants. They're down about 15 percent.
But he says they could see a major rebound if the price of oil comes down. That would make gas cheaper, and leave more Americans feeling flush.
I'm Sam Eaton for Marketplace.
