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 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 a colleague -- a very sharp Dumpster-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.

This is a situation that's 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 like JPMorgan Chase and Wells Fargo deserved drubbings, thanks to their opaque balance sheets.)

Yet other smaller, easier-to-understand companies were presumed dead very prematurely. Remember the automaker massacre? Pundits predicting who would be next on the bankruptcy block? And that no one would ever buy cars again? Well, that situation was untenable even without "cash for clunkers." As one example, when it turned out Autoliv -- a company with a more-than-manageable debt load and rock-solid relationships around the world -- would survive just fine, the 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. So 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 six months, and you come up with a couple of dozen. Here are a few of the more familiar names from the top of the heap.

*As of June 1 and Dec. 1, 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, it's one of our top priorities at Motley Fool Hidden Gems, where we don't just look for growth, but also for mispriced market emotions. Moreover, we've redesigned the service to allow us to use real money and real-time alerts, the better to take advantage of Mr. Market's fits and fury. Of course, it's not always the case that value is realized so quickly as in some of these examples, but it never hurts to take a look at what seems to be on sale.

In order to help our members keep tabs on Mr. Market's fits and our opportunities, we're upping our service level, providing a weekly video update on which of our stocks are moving (and why) along with an in-depth (24 pages and growing) report on all our investment moves, updated twice per month. If you'd like to take a look, a risk-free trial is on me.

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. Autoliv is a Hidden Gems recommendation. Fool rules are here.