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Ugly Stocks, Great Opportunities

Tim Hanson
December 22, 2007

Value investing is one of the most successful money-making strategies in the market. Master investor Warren Buffett, for example, has earned greater than 20% annualized returns for the past 40 years by buying good companies when they're cheap.

Unfortunately, companies often get cheap for a reason: Something may be wrong with them.

The ugly
One of Buffett's best investments was taking a major stake in Coca-Cola (NYSE: KO  ) in the fall of 1988 -- in the aftermath of 1987's Black Monday crash, when most analysts thought Coke's growth prospects looked dim.

Since 1988, Buffett's investment in Coke has earned impressive 16% annualized returns. But the company struggled along the way -- in recent years analysts began doubting the brand's power and growth prospects. Yet since November 2005, you could have bought Coke and earned 50% returns in just two years' time!

Motley Fool Inside Value lead analyst Philip Durell was among the few who didn't think the market could keep such a great company down for long. He recommended the company to subscribers in the January 2005 issue, for many of the same reasons Buffett bought in 1988. Coke's situation was just (but not too) ugly enough to get you a great price on a good company.

The same could also be said for the public relations difficulties facing Wal-Mart (NYSE: WMT  ) , the credit crunch fears that have waylaid retail bank behemoth Bank of America (NYSE: BAC  ) , or the energy price volatility that keeps causing drops in Chesapeake Energy (NYSE: CHK  ) , Nabors Industries (NYSE: NBR