Mr. Market Just Gave Us A Rare Profit Opportunity

Earnings season is an emotional time on Wall Street, and I think it's the perfect time to revisit Ben Graham's famous description of "Mr. Market."

Ben Graham was Warren Buffett's business school professor. Graham wrote several books explaining how he thought about the markets, and in one of those books, he compared the market's price swings to the lunatic ravings of Mr. Market. In Graham's description, when Mr. Market is happy, he will bid the price of stocks up. But suddenly and often for no apparent reason, Mr. Market will fall into a deep fit of despair. Then he wants to sell all of his holdings at low prices, and he won't take no for an answer.

Graham explained that it's important to ignore Mr. Market and make buy and sell decisions based on value. This can be difficult to do because it's easy to get caught up in the market's reaction. But both Graham and Buffett achieved success by ignoring the market swings and focusing on value.

Sometimes, Mr. Market's judgment is entirely rational. Selling may seem to come from nowhere and be extreme, but it may actually be the right response. This is especially true during earnings season.

Market prices are forward-looking. Analysts use all of the information available to decide what the value of a stock should be. In earnings season, new information becomes available, and analysts have to re-evaluate their models based on these new facts and insights. That's why we see stock prices make large and rapid moves in earnings season.

But occasionally, Mr. Market's emotions push prices too far as traders overreact to news. In these cases, Mr. Market is actually giving us an opportunity.

But this week the market provided us with one of those opportunities in United Rentals (NYSE: URI).

I've written about this company in the past within my premium newsletter, Income Trader. United Rentals rents equipment to construction companies and others who need industrial equipment. The company provides customers with access to about 3,300 different types of equipment like backhoes, forklifts, and boom lifts through more than 880 locations. In addition to serving the commercial market, the company also provides equipment to homeowners like pressure washers and smaller earth-moving equipment. Altogether, the company has 400,000 different pieces of equipment available for rent.

While the value of this service to small contractors is obvious, small towns and other government agencies are also frequent customers of United Rentals. Large companies can save money by renting equipment they need infrequently or by essentially outsourcing maintenance and accounting to URI.

This is an attractive business opportunity for United Rentals and its customers. Competitors could be tempted to try their hand at the business, but there is a high barrier to entry that protects URI from excessive competition. URI has a fleet of equipment that is worth about $9 billion, with more than 880 locations and 12,000 professionals to help customers get exactly what they need. It would take decades for a competitor to develop a network like that.