Using Bad News to Buy Undervalued Stock

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Published: 04th December 2016
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The times are torrid, gloomy and unpredictable. Once flourishing companies are now teetering on extinction. A cash rich investor with thorough market knowledge and access can easily acquire the much devalued shares of such unfortunate companies at rock bottom prices that would work out to just a small part of their original value. To really understand the complex character of these shares, and to know which of them may fall under the category of eternal losers and which among them may be jewels lying hidden, waiting to be exploited at a later stage, is indeed a difficult proposition to resolve. The tests mentioned below are quality yardsticks to guide you on whether you should invest in particular stocks or just retain your money as cash.

A proper analysis of a company from which you perceive an exodus of investors can sometimes offer a reason for the exit that belies your comprehension. Even assuming that these companies' shares have suffered a 75 % decline, investors may not be willing to risk investment there for the sheer fact that these shares offer no hope and are not worth investing upon at any price, and are thus relegated to the trash can.

Sometimes, singular mistakes on the part of the management at a particular juncture, can unleash problems that look insurmountable. Take for example the period of the Savings and Loan calamity that brought down bank stocks to abominably low levels. Investors, who went against the tide and invested in those stocks at that time, invoked the ridicule of their contemporaries and friends. Simultaneously, rock solid companies with competent management, good balance sheets and a high market standing suffered the same fate of undervalued stocks as the smaller banks. The ensuing years confirmed the astuteness of the investors who took the risk of investing in the bank shares, as their stock values soared and you had a bunch of happy investors with swollen profiles. This story reminds us of an old adage, which reiterated that success follows those who use their own analysis in investment decision making that has nothing to do with following public opinion. Evaluating investment decisions based on its prospects and suitability to market capitalization is the pathway to success.

You would do well to remember the yardsticks for investment. Invest in companies that have shown low or nil debt, and are businesses that adopt the non-asset intensive models, with good returns on equity, and operating in the sphere of industries without fixed cost models that are not commodity based. You must search for undervalued stocks of larger companies that will show a better resilience and faster recovery when compared to smaller specialty retailers, whom you may perceive waiting longer for the recovery of their share prices to old levels.
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Anastatia Apti is an expert in writing on finance and investments in the international arena and throws open a plethora of ideas to help his readers. For more information, please go here VoIPTel Dubai

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