Waking Beast:
This is where things begin to get exciting for us. For some reason these stocks are significantly undervalued (selling well below their Intrinsic Value), yet there is nothing necessarily wrong with them. For the most part they might be growing at a good pace, have a good management team and a product that is in demand. Yet, the market has sold them off.
There might be a number of reasons. The industry itself might be going through a downshift, there might be a bubble elsewhere in the market and it sucked up all the capital, there might be a misconception about the company or they are simply not sexy enough.
Home builders in early 2000’s would be a perfect example of that. At the time they were selling at huge discounts to their Intrinsic Value even though the housing boom was in full swing. Most of the companies in the industry were selling at 30-75% discount to their Intrinsic Value even though people were literally fighting and standing in lines to get access to their products. Their financial positions and management teams were superb as well.
These are the types of opportunities value investors should be excited about. The company is doing great on every front and is substantially undervalued, yet for some reason the market has discounted it well below what it is worth. Now that you have your margin of safety built into your purchasing price it is highly probable that these stock will appreciate significantly over the next few years or months to fully reflect their Intrinsic Value.
In conclusion, that is exactly what you are looking for. Highly discounted stocks that are doing very well and are position to appreciate significantly over a short period of time. That is how you minimize your risk while maximizing your gains. Unfortunately, you won’t find many of these stocks out there. When you do, start buying.
Rocket Ship:
These stocks won’t come across your desk very often, but when they do you will be able to make huge sums of money. As Warren Buffett so famously says, “Wait for the perfect pitch”. Well, these are your perfect pitches. These stocks are dirt cheap, but they shouldn’t be. It could happen for two reasons.
1. The market has a misconception about the stock and has misprices it significantly. Yet, your fundamental research clearly shows that the market is wrong and the stock should bounce back soon.
2. There are adverse market forces (like a severe bear market(2007-09)) that drive great companies well below what they should be worth. Eventually the market recovers and you make huge sums of money.
These are the companies that are doing everything right. They have strong financials, a great management teams, a great future, new products, etc… Yet, the stock price was driven down well below Intrinsic Value of the company. If your fundamental analysis confirms that the decline was unjustified and the stock should rebound soon, buy as much as you can. These types of investment opportunities will be your large money makers. Don’t forget to look for the catalyst as well. Something that would set the climb in motion.
(A word of caution. Just as I talked about in the Dead Man Walking category, make sure you are not missing something. Make sure that your fundamental analysis didn’t miss an important point that the market sees and you don’t. )
To be continued….
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