Vanishing Values

There's only one problem with looking for value investments in the stock market: Those opportunities don't last forever. For instance, in March of this year, online DVD rental pioneer Netflix (Nasdaq: NFLX  ) traded as low as $8.91 a share because of market fears of a one-two punch from ailing bricks-and-mortar video loaner Blockbuster (NYSE: BBI  ) and online retailing giant Amazon.com (Nasdaq: AMZN  ) . Rumor had it that Amazon was planning to build its own Netflix-equivalent service, and with its "No Late Fees" campaign, Blockbuster finally seemed to be fighting back against the online competition that had flattened it. Now, several months after that bout of panic, Netflix shares recently changed hands at $30.07, up some 237%. For those scoring at home, that's more than a triple, in just about eight months.

Partially fueling Netflix's surging shares is the speculation is that Amazon may be considering buying Netflix lock, stock and barrel. This just goes to show that the old saying, "If you can't beat 'em, buy 'em," still holds water today. If the rumored $42 price tag is for real, then the folks who bought below $9 earlier this year will more than quadruple their money, a phenomenal return on their investment. Unfortunately, at this point, the opportunity to profit from the market's discount on Netflix is long gone. Like so many values before it, that chance went to those who were prepared to make their move during a short window.

What goes around, comes around
While that one opportunity has come and gone, history shows us that the Netflix story is not unique. Similar situations present themselves on a fairly regular basis to those of us who are continually on the prowl: merely "OK" businesses that happen to be trading at extraordinarily attractive prices.

Do you honestly believe that Netflix is more than a merely "OK" business? Go ahead and send me your criticisms. The fact is that Netflix, while a far more nimble company than its nemesis Blockbuster, faces pressure from all sides. On one hand, video-on-demand services allow cable operators like Time Warner (NYSE: TWX  ) and Comcast (Nasdaq: CMCSA  ) to give customers a way to rent what they want when they want, without waiting for a disc to arrive. And with discount retailers like Wal-Mart (NYSE: WMT  ) constantly driving down the price of purchasing new DVDs, the savings that come from renting are rapidly evaporating. Things are tough, and they only look to get tougher as competitors start to take advantage of their economies of scale.

Profit from panic
Yet it's just that fragility that allows us value investors the opportunity to take advantage of the market. With a business that can be so easily threatened, whenever news comes out that exposes those potential issues, Wall Street starts to panic. With that worry often comes unreasonably depressed share prices and a chance to profit by buying, then holding on as the irrational concerns subside and prices rebound. It really is that simple.

Late last year, in fact, my friend and colleague Philip Durell, lead analyst for Motley Fool Inside Value, suggested that members of that service take advantage of just this kind of opportunity in nursing home pharmaceutical distributor Omnicare (NYSE: OCR  ) . The unfortunate combination of cash-strapped states threatening to cut back on Medicaid reimbursements and a series of stumbles related to Omnicare's proposed (and ultimately successful) acquisition of rival NeighborCare led to a dramatic sell-off in its shares in mid-2004.

With a large chunk of its existing revenue apparently at risk and its expansion plans on the rocks, Omnicare's business had certainly lost its luster. Yet thanks to that diminished shine, its shares simply became too cheap to ignore. Now that the Medicaid funding crisis has passed and the NeighborCare acquisition has been completed, the worry that had been priced into Omnicare's shares has evaporated. Up some 90% since Philip's pick, Omnicare has easily lapped the S&P 500's 10% growth in the same period.

The Foolish bottom line
As value maven Benjamin Graham discovered more than half a century ago and Philip Durell has confirmed today, merely average businesses can still make superb investments if you can buy them at deep enough discounts to their true worth. To take advantage of such opportunities, however, you have to be prepared to move when the market makes the offer available. If you wait too long, that value will vanish and those temporarily under-priced shares will become someone else's value investing success story rather than yours.

Are you willing to do a little dumpster-diving to find companies trading at dramatically discounted prices? If so, thenInside Valueis the place to learn how to do just that. Click here to start your no-obligation, 30-day free trial and start figuring out how to capture your own market values before they vanish.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Omnicare. Netflix, Time Warner, and Amazon are Motley Fool Stock Advisor picks. The Fool has a disclosure policy.


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