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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.