Are Toyota's Troubles an Opportunity?

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What looks like bad news can sometimes be a good thing for investors. History has shown us that many companies bounce back from lousy luck, delivering solid profits for those who had the courage to invest during troubled times.

Take Toyota (NYSE: TM  ) , for example. A massive recall of its most popular models has left a nasty dent in its share price, reputation, and bottom line. But while the company is hurting from its problems with faulty gas pedals, the stricter safety procedures that will likely result from its troubles could leave the company -- and its customers -- better off.

Yet many investors don't seem to share that view, wondering instead whether the company's glory days are behind it. Their lack of confidence may explain why Toyota's shares have fallen more than 10% since early last week.

Carpe diem
Frankly, the incident reminds me of Johnson & Johnson (NYSE: JNJ  ) and the famous 1980s Tylenol-tampering scandal. In late 1982, seven people died from cyanide poisoning after taking tainted Tylenol. The stock lost 20% of its value in just a month, as investors lost confidence when they saw the company recall and remove the product from shelves, and face losing millions of dollars.

But by November, the stock had exceeded its September high. And more importantly, by acting swiftly and quickly, the company regained investors' confidence as it put the safety of the public first.

When calamity strikes a company, it can provide investors with a great opportunity. Our recent financial meltdown sent stocks like Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  ) plunging, only to subsequently recover. And while many people wrote off the U.S. auto industry recently, Ford (NYSE: F  ) stock is now up more than 10 times from where it traded in late 2008.

Sometimes, a calamity or bad news isn't necessary; a simple loss of confidence is enough to seriously depress a stock. That's when you have to ask yourself whether you believe that the company's troubles represent an opportunity or a trap.

If you think that Toyota has the wherewithal to get its act together again, you might be looking at an attractive buying opportunity. But you should always be extra-diligent and cautious in your research with beaten-down stocks. Many stay down -- and some end up going out of business.

Have you ever invested in a beaten-down company? Tell us about how you fared -- leave a comment below!

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson. Ford Motor is a Motley Fool Stock Advisor pick. Johnson & Johnson is a Motley Fool Income Investor recommendation. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 01, 2010, at 4:09 PM, zeuscy wrote:

    I bought 300 shares of ORACLE back in early 1990's for 4 bucks. I sold them for what I thought was a killing around 8 and 13 in the next year or so. I only wish I knew about the fool back then I would still be hodling them.

  • Report this Comment On February 01, 2010, at 4:24 PM, Optimyst wrote:

    Not yet. This stock is going to drop much more. First, Toyota's halo is gone - they are fallable like the rest of the competitition - which will spur many loyal customers to consider other brands. Second, it will take quite a while for dealers to install the fixes to all the cars currently on the road - which will be a huge customer dissatisfier. Third, congressional hearings will keep this disaster in the headlines for quite a while longer.

    Personally, If I was driving a Camry, or any other Toyota for that matter (affected or not), I would be embarrased that my blind loyalty was exposed and compromised. And even after my Camry was "repaired", I would still have a shadow of a doubt that the repair was actually sufficient. Just that shadow would be enough to get me to try another brand.

    They are going to lose quite a bit of market share this year, of which they will probably never recover.

  • Report this Comment On February 01, 2010, at 4:39 PM, BioBat wrote:

    The comparison between TMs current woes and JNJ isn't really a valid one to make. With the JNJ, you had an oustide party tampering with their products and they recalled tylenol immediately. With Toyota, you have a company that's had accelarator issues for some time now but have blamed it on anything and everything other than faulty engineering AND they still refuse to replace the accelerators opting instead for the much cheaper (but publicly much worse) method of putting a metal shim inside the accelerator mechanism and HOPING that it works ok. Sheesh. You think these guys would have figure out that band aid solutions (ie. fixing the floormat) aren't the problem here.

    Good job Toyota!

  • Report this Comment On February 01, 2010, at 7:21 PM, cecilia2006 wrote:

    I bought 3K shares of NWA at .30 and sold it at 5.50 before the stock was vaporized. I was purely speculating and made a good profit, but I could have lost it all.

    Any company can fail, but, being a loyal Toyota driver, I have complete confidence that TM will weather this storm.

  • Report this Comment On February 02, 2010, at 4:16 AM, snafflekid wrote:

    The Tylenol incident came immediately to my mind as well. However, the Tylenol was destroyed but the cars are just being fixed. I suspect the effects of this recall will linger a bit, but TM will come back eventually.

  • Report this Comment On February 02, 2010, at 9:13 AM, BioBat wrote:

    Unlike JNJ and Tylenol, Toyota has been doing everything to distance itself from any fault whatsoever. They have been in denial about this issue for years. This is a clear case of corporate negligence.

    2008 - TM concludes that years of complains from accelerator problems are unrelated to safety.

    Aug. 28, 2009 - The horrific 911 call/accident that got splashed over the newspapers from a runaway Lexus.

    Sept 29, 2009 - NHTSA recommends removing floor mats as a quick fix to the acclerator problems.

    Oct. 2, 2009 - Toyota and NHTSA issue warning about floor mats.

    Nov. 4, 2009 - Toyota issues a statement indicating that the NHTSA found no defect exists in vehicles in which the floor mat is properly secured. The NHTSA responds and says that is patently false and that removing the floor mat is only a temporary measure.

    Nov. 25, 2009 - Toyota begins recalling vehicles with another apparent fix.

    Dec. 26, 2009 - Four people die in a runaway Avalon that speeds into a pond. The floor mats were in the trunk.

    Dec. 28, 2009 - A NJ man manages to stop a runaway Avalon by shifting in and out of neutral driving his car to a dealership where he parks the car the motor runs crazy and brakes and tires start smoking.

    Jan 21, 2010 - Toyota issues another recall.

    Jan. 26, 2010 - The Transportation Department tells Toyota they have to take more stringent action

    Jan. 29, 2010 - Toyota expands recall.

    Feb. 1, 2010 - Toyota says it will have fixed the accelerator problems with a tiny metal shim.

    Seeing as other cars with the same accerators don't seem to be having this problem, I'm inclined to think the metal shim isn't going to work any better than removing the floor mats did and it's more of a problem with the electronic system. Even if the shim does work, the negligence by Toyota on actually addressing the issue damages its reputation. It's not irreperarable, but with other manufacturers looking to gain market share during a recovery boom, it's not a blip that's going to be overcome easily.

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