Double Down on These Home Run Hopefuls

I love when I read a headline promising me hundreds of thousands of dollars or a quick retirement, only to read on about some obscure investing technique I've never heard of. Or sometimes you read an article about how some investor made $1,000,000 trading corn futures while he/she was dually buying options on a random Chinese agricultural producer.

Who the heck has the time, skill, or energy for all that? I sure know I don't.

Unfortunately, I can't lie and say I've just made $100,000 or some other absurd amount of money. But I can say that in the past few months, I made the easiest $2,500 I've ever made, and there's nothing complicated about what I've done.

Let me explain
In early May, I opened a position in the Spanish telecom company Telefonica (NYSE: TEF  ) when it was trading for about $65 a share. I had done a fair amount of due diligence on the company, and I thought that its dominance in Europe and exposure to Latin America was very promising. I also felt that because the Spanish economy was in such turmoil, the stock was being unfairly punished, and was therefore significantly undervalued.

Then, within one month, the stock dropped by about 20% to $53. Uh-oh.

Did I not value the company correctly? Was the Spanish macro environment worse than I thought? What was I missing? Ultimately, should I sell my shares and get out?!

Instead of panicking and selling out of fear, I went back to the drawing board. I revisited my original thesis and realized that not only was it still intact, but the situation was also possibly better than it had been before. Telefonica had successfully bid for shares of Brazilian wireless provider Vivo, which would ultimately help it compete with other big players in the region like America Movil (NYSE: AMX  ) .

So even though the stock was sitting at its 52-week low, I decided to add $5,000 to my position. Since that time, shares have surged by about 50%, where they now stand at $79.

I had already done my homework when I made the original purchase; the hard part was already over. Staying calm and making a sound decision when the market did the opposite of what I thought it should be doing -- that's what made me an easy $2,500. In fact, I urged Motley Fool readers to do the same when I recommended they buy the stock in August, just a few months later.

3 stocks for a possible double down
The following stocks are all trading way below their 12-month highs and accordingly have dirt cheap price-to-earnings ratios. Of course, there could be great reasons why the shares have been battered, but if you own them, now could be the time to check back on the fundamentals and possibly double down on your original investment.

Fuqi International (Nasdaq: FUQI  )

  • 72% below its 12-month high
  • 3.9 price-to-earnings ratio

Fuqi is an online jewelry developer and seller in China and has been on a tremendous roller-coaster ride in the past few years. Investors bid the stock nearly to $30, believing in the profitability of the company and having faith in its cash-rich balance sheet. However, the stock has gotten pummeled because the company failed to file last year's 10-K and subsequent quarterly filings, and short-sellers smelled something afoul.

Nevertheless, the company recently filed an 8-K with the SEC illustrating that its accounting firm's reports on its 2007-2008 statements didn't include any adverse opinions. The bottom line is that if you own this stock and believe management, then your thesis may be still be intact -- but now you can actually invest at a much better price.

RAIT Financial Trust (NYSE: RAS  )

  • 62% below its 12-month high
  • 3.2 price-to-earnings ratio

While some financial REITs like Annaly Capital (NYSE: NLY  ) and spin-off Chimera (NYSE: CIM  ) have been able to dodge the financial meltdown by taking advantage of low interest rates, others like RAIT Financial haven't been as fortunate. Over the past year, shares have dropped by almost 30%, despite announcing its third consecutive profitable quarter and an improving debt situation.

The panic-selling began when the company announced a possible share dilution, but that hasn't come to fruition. So if you still think that the commercial real estate sector is being priced for catastrophe and that a turnaround is right around the corner, then revisit your original thesis. The fundamentals seem to be improving at this REIT, so a double-down may not be such a bad idea.

Jinpan International (Nasdaq: JST  )

  • 61% below its 12-month high
  • 9.2 price-to-earnings ratio

Jinpan is a provider of high-end electricity transformers and helps take high voltage powers down to a much safer level. The company says it's the No. 2 provider in the regions it serves (mostly in China), and is both profitable and cash-flow positive; it also happens to be a recommendation from our Motley Fool Hidden Gems newsletter.

However, the stock is down more than 50% so far this year due to disappointing revenue and earnings, in addition to a decrease in market share as smaller competitors jumped into the space.

Nonetheless, Jinpan's management is maintaining full-year guidance for revenue, earnings, and margins, so if you believe management's word, then now could be the perfect time to double down.  

The Foolish bottom line
When you buy a stock in the first place, you should be doing a lot of research and due diligence to make sure that you've made a sound investment. If shares happen to plummet, then don't panic. Check back on all that original homework you did, and if you still believe in the company, then by all means, double down!

Don't have the time or resources to find a stock that's worth a double-down? Click here to get our five-page free report, 5 Stocks The Motley Fool Owns – And You Should Too.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Jordan DiPietro owns shares of Telefonica. Jinpan International is a Motley Fool Hidden Gems pick. The Fool owns shares of Annaly Capital Management and Telefonica. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (79)

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 October 14, 2010, at 1:30 PM, CFischer wrote:

    Glad your trade worked out Jordan, it looks as thought you did your homework. That being said, you're timing may be better than your analysis, since the broader market has had a huge rally from when your doubled.

    But you simply averaged down, which for many investors is a mistake because the cognitive biases related "getting back to even" and avoiding a loss. Do you have any other stocks in your portfolio that were not down, but would have done well if you added to in the same time period?

    The problem here is where your analysis is wrong, and you add money to a loser. For all the people that bought Netflix at 160-170, and are adding to it in the 150's.. I have a feeling that is not going to work out so well.

  • Report this Comment On October 14, 2010, at 1:42 PM, PeyDaFool wrote:

    "The problem here is where your analysis is wrong, and you add money to a loser. For all the people that bought Netflix at 160-170, and are adding to it in the 150's.. I have a feeling that is not going to work out so well."

    Great point, CFischer. My Smart Balance shares are down about 38% since I bought them last year and I've been doing my best "due diligence" to see if I should double down and add to my holdings, but I'm uncertain the stock will perform in the future. Adding positions to a stock because it's gone down is not always a good idea if the stock is still overvalued.

    Of course, I don't think this takes away from Jordan's article since Jordan is sporting stocks with P/E values under 10, compared to Netflix's super-high P/E. Nevertheless, it's a worthwhile point to note determining the true valuation of a stock is easier said than done.

  • Report this Comment On October 14, 2010, at 1:47 PM, TMFPhillyDot wrote:

    @PeyDaFool,

    Funny you should mention SMBL -- I also own shares and of course they are down substantially. This is the sort of stock that concerns me though, in terms of adding to my position b/c so much is riding on whether their milk can gain traction in the market. I feel like I see poor product placement in the supermarkets and I'm definitely watching this stock carefully. If you have any opinions, feel free to shed some additional light!

    Thanks for the comments,

    Jordan (TMFPhillyDot)

  • Report this Comment On October 14, 2010, at 2:04 PM, rockbox64 wrote:

    Hey Jordan. Got into TEF at 69 right after the Tivo acquisition for a 1/4 position. I'm looking to add but the price looks at little frothy at 81-82. Whaddaya think? Keep waiting for the dip. Whaddaya think? way to stay in the saddle, btw.

    '

  • Report this Comment On October 14, 2010, at 2:05 PM, TMFPhillyDot wrote:

    @stockmarket10101,

    Thanks for the comment!

    I agree about JST -- negative revenue growth over the past year is certainly concerning; it's just been beat up so bad you start to wonder if it's been over-corrected. An interesting company, for sure.

    Fool on!

    Jordan (TMFPhillyDot)

  • Report this Comment On October 14, 2010, at 2:08 PM, TMFPhillyDot wrote:

    @rockbox64,

    My personal opinion is that the stock is worth somewhere around $85; for my own portfolio, when it gets at or above that price, I will probably sell. So at today's price I wouldn't add to my position; although like you implied, with the state of the Spanish economy it wouldn't surprise me if the stock ended up going back down, it's been fairly volatile.

    Thanks for the post!

    Best,

    Jordan (TMFPhillyDot)

  • Report this Comment On October 14, 2010, at 4:09 PM, mbawharton wrote:

    Price is what you pay, value is what you get.

  • Report this Comment On October 14, 2010, at 4:19 PM, jaketen2001 wrote:

    Ugh. Anybody that thinks a recovery is just around the corner in commercial real estate need to have someone else handle their money. The meltdown has not yet started. Vacancies are soaring and tenants are demanding lower rents/renewing at lower rents. Models are totally out of alignment.

  • Report this Comment On October 14, 2010, at 8:00 PM, OlimDives wrote:

    Did you sell the shares? If you have not then you have made $0. If you did sell then you are not investing so much as you are intrading. My new hyrbid word for investment based trading that most people do now-a-days. Either way, good work and due diligence.

  • Report this Comment On October 14, 2010, at 8:11 PM, KZMike wrote:

    I have to agree with jaketen2001. . . in most all parts of the country commercial RE is yet to see the end of the tunnel with some regional exceptions. There is some positive signs in the Puget Sound area [Seattle], but not enough to make buys as is noted in the article above. . .

  • Report this Comment On October 14, 2010, at 8:11 PM, scanlin wrote:

    FUQI makes me nervous because you never know if there are accounting irregularities there or not. But one thing for sure, the option premiums are pretty rich. I'd be tempted to do a covered call to hedge my bet a bit. With the stock at 8.13 you can get 95 cents for the Nov 8s and 60 cents for the Nov 9s. Those represent annualized rates of return of 113% and 79% (if the stock stays flat). No earnings before the Nov expiration.

    MikeS

    http://www.borntosell.com

  • Report this Comment On October 15, 2010, at 4:53 AM, devilzadvocate wrote:

    Good Post.

    I did double down on NEP around 20th of Sep. The stock was down to 4.50 then and it's close to 8 today. So, it was easy money if you believed in your initial analysis.

    I had taken my initial position in NEP @ 9:50..

  • Report this Comment On October 15, 2010, at 5:07 AM, 11x wrote:

    The TEF double down had a happy ending, but sometimes they don't. Or sometimes you wait years to recover losses. Or sometimes you double down and the stock is once again trading below your buy point a few years later. We must remember stocks go up and down to a degree that we could show a loss for quite some time on a perfectly goood investment.

  • Report this Comment On October 15, 2010, at 9:18 AM, TMFPhillyDot wrote:

    @11x,

    You are right on the money. Just because you double down doesn't mean the market will all of a sudden realize your genius and boom, your stock runs to fair value. My example was mostly for the sake of "easy-to-read", but yes, often times it will take years -- but any buy-and-hold investor should feel comfortable with that.

    Fool on!

    Jordan (TMFPhillyDot)

  • Report this Comment On October 15, 2010, at 11:15 AM, drkazmd65 wrote:

    I'm mostly an index-fund kind of investor, but tend to keep a couple of %of disposable income aside for more speculative investing.

    Have been trying to decide whether to 'double down' pretty much literally on a biotech stock (NNVC). Bought in a bit at $1.20/share early this year, bought a bigger chunk when it was up over $2.20/share this summer, and now it is down to ~$1/share again.

    My head says "Yes", but my gut has me hesitating. I am oh so NOT a trader and figure the timeline to real success on this stock is 2-4 years.

  • Report this Comment On October 19, 2010, at 2:05 AM, tomasovich wrote:

    Big Congrats on JST yesterday--I bought all I could, was great

  • Report this Comment On October 21, 2010, at 9:47 AM, THEMATHISNEAR wrote:

    Like so many other 'easy money' strategies, it works great until it doesn't. My AOB shares are proof of the downside of this strategy. I'm not saying that doubling down is a bad strategy, just that making it sound simple is misleading. Fuqi could just as easily turn into a multi-year loser like AOB as turn into a quick payday.

  • Report this Comment On November 25, 2010, at 10:25 PM, Mstinterestinman wrote:

    I have two positions in the Red but at least imo they are undervalued. NUE AND nbg both are in areas where fear is widespread.

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