Buy Before It's Too Late

When I first penned this article many months ago, it sprang from my regrets about not buying shares of a steel company I knew was a value -- maybe even a steal. I'd done the research. I'd considered the odds. I thought the then-current share price vastly discounted the company.

The company I was talking about then was Wheeling-Pittsburgh, a tiny producer that dropped from $45 to $8 per share after it suffered the quadruple whammy of raw material supply problems, technical setbacks in plants and new furnaces, a tough steel price environment, and some trouble with loan covenants.

But while trouble is trouble, the stock traded down until it was selling for about half of its tangible book value. Half! What's more, it looked as though survival was not only possible, but also highly likely. And in the event things went bad? Half of tangible book value? That's a heck of a backstop in the case of a fire sale.

I'd discussed all of this with a colleague -- a very sharp garbage-diver who picked this one up off the 52-week-low list. He was generous enough to have shared the idea with me, but also smart enough to have taken his fingers out of his nostrils (unlike yours truly) and bought shares.

So what did I do? Hey, I figured there was no hurry. I figured I could afford to wait a bit and see how things progressed. Wrong!

The big jump
Shortly after I neglected to buy, Wheeling-Pittsburgh jumped more than 50% -- some of the jump was unexplained, but some of it directly followed merger activity in the space. My theory was that given the acquisition derby at the time, big money out there would think it was time to buy up cheap steel. That's exactly what ended up happening.

This situation has been repeated many times over the past few months. Sure, the economic uncertainty we've weathered punished many stocks deservedly. (You might make the argument that even winner-take-all financials such as JPMorgan Chase and Wells Fargo, with their opaque balance sheets, deserved drubbings.)

Yet other smaller, easier-to-understand companies were presumed dead very prematurely. Remember the automaker massacre? Pundits predicting that this company or that was next on the bankruptcy block? And that no one would every buy cars again? That situation was untenable even without "cash for clunkers," and when it turned out that Autoliv – a company with a more-than-manageable debt load and rock solid relationships around the world – would not only survive just fine, its shares doubled in short order.

The lesson here is timeless, and one we never forget at Motley Fool Hidden Gems (where we recommended Autoliv back in January, during the depths of the meltdown. It's a simple lesson we've learned from value investors from Buffett to Olstein: You can't time the bottom, and you can't wait for a catalyst. By the time that happens, it's too late. When something's cheap, you buy it. If it gets cheaper, consider buying more.

Unfortunately -- make that fortunately – it's simple to verify the way this history repeats itself in the market. Run a quick screen of major U.S. companies that jumped between more than 100% over the past year and a half, after having dropped at least 20% in the previous 6 months. You'll come up with a couple of dozen contenders. Here are a few of the more familiar names from the top of the heap:

*As of Aug. 15 and Feb. 15, respective years. Screening and data from Capital IQ, a division of Standard & Poor's.

Lessons learned
If you take anything from this article, let it be the ability to recognize cheap. And if you find cheap, take it. But be aware that all cheap is not equal. Separating good cheap from bad cheap is vital to your success.

Need some help recognizing what good cheap is, or some courage in helping you take the plunge when you find it? That assistance is one of our top priorities at Motley Fool Hidden Gems. We don't just look for growth, but also for mispriced market emotions. Moreover, we've redesigned the service to use real money and real-time alerts, the better to take advantage of Mr. Market's fits and fury. Of course, value's not always realized as quickly as it was in some of these examples, but it never hurts to peruse what seems to be on sale.

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This article was originally published on Jan. 31, 2006. It has been updated.

Seth Jayson is co-advisor at Motley Fool Hidden Gems. At the time of publication, he had no position in any company mentioned here. View his stock holdings and Fool profile here. Autoliv is a Hidden Gems portfolio candidate. Fool rules are here.