Buy Before It's Too Late

When I first penned this article many months ago, it was occasioned by my regrets about not buying shares of a steel company I knew to be 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 steelmaker not to be confused with the likes of Nucor. We're talking about 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 to a point where 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 my Foolish colleague, Bill Mann -- a very sharp garbage-bin-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 was directly following merger activity in the space. My theory was that given the acquisition derby these days, big money out there would be thinking it's time to buy up cheap steel. And that's what ended up happening.

The lesson here is timeless. Don't do what I did. Listen to the masters. Successful value investors from Buffett to Olstein have explained that you can't time the bottom and you can't wait for a catalyst. By the time that happens, it's too late. So when something's cheap, you buy it. If it gets cheaper, you buy more.

Over the past 18 months or so, I was sure I'd missed out on dozens of such opportunities. I was right. I ran a quick screen of major U.S. companies that jumped between 50% and 200% in the same time period, after having dropped at least 20% in the previous six months. This table lists just a few from the top of the heap.

Company Name

% Original Drop

% Return

Luminex (Nasdaq: LMNX  )

 (27.9%)

 77.3%

True Religion Apparel (Nasdaq: TRLG  )

 (25.5%)

 67.5%

Meritage Homes (NYSE: MTH  )

 (24.3%)

 60.0%

Tenet Healthcare (NYSE: THC  )

 (26.5%)

 51.0%

PHI (Nasdaq: PHII  )

 (21.6%)

 47.7%

Hancock Holding (Nasdaq: HBHC  )

 (20.1%)

 43.3%

Beacon Roofing Supply (Nasdaq: BECN  )

 (24.2%)

 39.4%

*As of Sept. 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.

If you need some help recognizing what good cheap is, or some courage in helping you take the plunge when you find it, Motley Fool Inside Value can help. It's not always the case that value is realized so quickly, but it never hurts to take a look at what's cheap. If you'd like to see what Inside Value is eyeballing, we've got a 30-day guest pass waiting for you.

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

At the time of publication, Seth Jayson had no position in any company mentioned here. Meritage Homes is a Stock Advisor recommendation. Fool rules are here.


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