Crush the Market With 1 Stock and 1 Simple Rule

Over the years, much has been written about Warren Buffett's two rules for investing. They are:

  • Rule One: Never Lose Money
  • Rule Two: Never Forget Rule One

That's great advice, but it's completely useless when it comes to daily decision-making about your investments. Today, I'm sharing some practical advice (and stock picks) you can actually use, and I only need one rule to do it. I'm certain Mr. Buffett would approve.

The One Rule: Make smart investments on unloved, risky stocks with fantastic long-term stories.

What it means
Sometimes the market crushes specific stocks, knocking their prices down from 52-week highs. Our job as investors is to sort through these stocks and find the ones to which the market has over-reacted. Ask yourself, "Has the outlook for the company actually changed?" Divorce yourself from stock price declines, Wall Street analyst calls, and the talking heads on various television channels. Just focus on the underlying company and its future prospects. If they're as sound as ever, then you may have a smart buying opportunity on what others deem to be a risky stock.

Now, let's jump straight into two stocks, why they're unloved, and my take on their long-term outlook.

Sandridge Energy (NYSE: SD  ) is currently sitting at 59% of its 52-week high.

Why it's unloved: Sandridge's bet on natural gas has not paid off due to persistently depressed prices. Despite a diversification into oil, the company carries a significant total debt load of almost $3 billion, which gives it a total debt-to-equity ratio of a very unhealthy 210%.

My take: Two years ago, I bet a chunk of my personal portfolio on natural gas, so I'm feeling Sandridge's pain; however, I generally don't like to see companies shift away from their previous focus after asset prices have already declined significantly. By divesting a large part of its assets in the Permian Basin, it could be mortgaging its future in order to survive right now. It’s hard to know, but I’m sure of one thing: I don’t like the debt situation, and this overall circumstance is just too murky to see through.

Overall, it seems as though there may good reason why investors think Sandridge isn't worth the risk, and at least at this point, I'm going to have to agree.

Next up, we have Cirrus Logic (Nasdaq: CRUS  ) , which is currently at 75% of its 52-week high.

Why it's unloved: Unloved may be a strong word for Cirrus, as it's up 150% over the past year; however, it's still down 15% versus the Nasdaq over the past three months, largely due to weak quarterly earnings and some concerns over its inclusion in future Apple (Nasdaq: AAPL  ) products, to whom it supplies audio chips for the iPad and iPhone. Apple represented 44% of Cirrus's revenue last quarter, so it's easy to see why this could make some investors nervous.

My take: I like Cirrus Logic over the long-term based on Motley Fool technology guru Eric Bleeker's analysis after his October interview with CEO Jason Rhode. In fact, I own it in my personal portfolio for the exact reasons mentioned in Eric's excellent article. The Apple threat is and was overblown, but that's not really our long-term story; it's what makes the stock risky in the short term and provides us with a buying opportunity.

The long-term bet is that Cirrus is making a vastly superior product at effective costs (hence its inclusion in Apple products.) If it's good enough for a very demanding Steve Jobs, it should be good enough for other smartphone players like Research In Motion (Nasdaq: RIMM  ) and Motorola (NYSE: MOT  ) . Once we see the sparks of diversification, this once risky stock could skyrocket.

That's not to say Apple doesn't drop it from the next generation of iPad and iPhone, which would devastate the stock in the short term -- we simply don't know. But that's the essence of my one simple rule. Put a portion of your portfolio in companies with great long-term stories that others are calling risky. Some will fail in the short term, but the big winners will more than clean up the losers.

How you can get started right now
The key is to always be on the lookout for other risky stocks worth buying at great prices. That's the core of Warren Buffett's investment philosophy and one worth following. In fact, Motley Fool analysts have been stalking Buffett's buying activity and have identified in a new free report one "risky" health-care stock that Buffett's been quietly buying. Today, I invite you download this free report, The Health-Care Play That's Worth the Risk, at no cost to you – no credit card required. Get instant access to this free report by clicking here now.

Jeremy Phillips owns shares of Cirrus Logic. Apple is a Motley Fool Stock Advisor choice. The Fool owns shares of Apple and Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (54)

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 December 15, 2010, at 11:50 AM, wsucougz wrote:

    I'm not going to get into an analysis of Sandride, but do your homework. Sandridge isn't selling gas assets in a down market, they are selling oil assets in an up market.

    You could see this by taking a 5 minute peak at their latest presentation, or instead, you could just look at their latest press release and draw some wildly off-base conclusions.

  • Report this Comment On December 15, 2010, at 1:55 PM, TMFMoby wrote:

    Hi wsucougz - thank you for bringing that to my attention. I regret the mistake and I'm glad that you caught it quickly. The article should be fixed in a few minutes.

    Jeremy

  • Report this Comment On December 15, 2010, at 1:59 PM, jrod87 wrote:

    Ya! you better FIX IT JEREMY! obvious mistake! comon man what do you get paid for any way???? lol as a Tech writter I can feel your pain...

  • Report this Comment On December 15, 2010, at 4:28 PM, bigticket14 wrote:

    On CRUS... Why did management sell all thier stock? and I do mean all their stock?

  • Report this Comment On December 15, 2010, at 5:34 PM, Wade32ru wrote:

    Yeah, the Permian acres that SD owns are about 85% oil on a unit of energy basis. Will SD's levered land grab strategy pay off? I'm betting on it:-)

  • Report this Comment On December 15, 2010, at 6:15 PM, renigan wrote:

    The hyperbole is getting thick.I'm a simple man.That's why I liked MF.Lately more and more

    the "screamers" like Bernie Schaeffer and Jim Cramer are showing out here. You titled this "Crush the market..." I did not see that in the article. Interesting,maybe,but "market crushing"?

    My 10 yr old grandson would say-not! And he's one of the best stock pickers I know. He knows what's hot right now. Not years down the road.

  • Report this Comment On December 15, 2010, at 6:19 PM, wsucougz wrote:

    Sandridge retains at least 8,000 potential drilling locations in the Permian alone. Further, they hold 500,000 acres in the Oklahoma Mississippian and 9,000 potential gas locations across the midwest, among other assets. They aren't big enough to tap into all of it.

    They will drill 900 oil wells in 2011, 95% of it funded by asset sales and JVs. $$$.

  • Report this Comment On December 15, 2010, at 6:37 PM, MichaelHamilton wrote:

    nobody is going to crush the market with any of this garbage

  • Report this Comment On December 15, 2010, at 11:08 PM, Notfooled1 wrote:

    I hope that none of you will be so foolish as to believe anything this Jeremy writes. His "research" will enable the market to crush you.

  • Report this Comment On December 16, 2010, at 7:29 AM, stockgains52 wrote:

    DS isn't not loved by all,

    Sd is one of few that can and is walking the talk of a blown-out stock to design a turn around plan then be able to execute the plan. A few months ago I was quite scepticle on SD but after learning as of recent that they are going forward on all projections INCLUDING taking down that big debt the article author liked to jump alll over. The author would bennifit greatly by listening to SD's speaker in LA just weeks ago telling the turn around story how well it really is going, (I believe the live webcast is on SD's site) and that is why this has been going up wonderfully in the last few weeks and will be going up a lot more. Stieful Nicholus didn't upgrade SD to a buy and a target of $7.5 because they are simple mouthy idiots, but educated well on what is going on w/SD

    I'm loving this stock and I have and will be profiting because I have educated myself and put my money where my mouth is.

    I've made my mistakes in past listening to CEO's who can't perform, SD is "once again" doing the walk.

    I sure how the author of this article isn't payed buy some short group of a kind or is shorting SD and is the reason for such complete lack of knowledge and in the end nothing less than a bashing for a profit.

  • Report this Comment On December 16, 2010, at 10:20 AM, CanadianJames wrote:

    I think some people are being a little harsh in criticism while missing the underlying principle of the article. I agree that the two companies mentioned themselves are not necessarily 'market crushing'. However, the principle of buying undervalued companies which have been oversold due to short term events, that maintain a good long term outlook, CAN be 'market crushing'. Look no further for evidence of this than our friends BP...

  • Report this Comment On December 16, 2010, at 12:09 PM, zbouck wrote:

    Another way to phrase this question is "Would I still invest in this company at this price if the stock market did not exist?

    If the answer is no, then you may need to re-evaluate your investment.

  • Report this Comment On December 17, 2010, at 1:31 PM, Alijac wrote:

    Jeremy, I don't know how many Fools are on board but if you promote any stock, whether it has sound fundamentals or not, there's a greater chance they'll buy some than offload extant holdings. The converse of this is true too if you decide to dump on a stock. And yes, there are some exceptions...like Berkshire Hathaway etc. But then, Warren has a few to speculate with if he wanted to test a different wat_er'rantly.

    I know of a very clever ploy to put a price on something that previously was as free as the breeze. If you knew how easy it was it'd blow you away.!

  • Report this Comment On December 18, 2010, at 3:32 PM, HDTVBG wrote:

    I love it when bad things happen to good companies.

    If you want to beat the market you buy deep in the money calls after negative news panics weak hands, jumping in and out with the oversold/overbought momentum. This has worked well with both EGO and SD recently as both cycled with wide swings over time. Has the author not noticed the strong SD rally of late? Sell into this strength and wait for the next inevitable trough to reload. You can't time the market long term. But you can time individual stocks short term if patterns emerge.

  • Report this Comment On December 20, 2010, at 2:46 AM, Friendlysurfer wrote:

    well, look at V Visa. They are hated and on the long run they will do great

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