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 trash-can-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, until it didn't.

Yet other smaller, easier-to-understand companies, such as Autoliv were also presumed dead prematurely. Remember the automaker massacre? Pundits predicting that Ford was next on the bankruptcy block? And that no one would every buy cars again?

Well, that situation was untenable even before "Cash for Clunkers." It turned out Autoliv -- a company with a more than manageable debt load and rock-solid relationships around the world -- rallied huge, putting up gains of more than 200% since we made it a Motley Fool Hidden Gems recommendation in January 2009.

But it wasn't only misunderstood, debt-saddled industrials that performed that trick. Cash-rich growers like Chipotle Mexican Grill (NYSE: CMG) were also run down by a jittery market, and when Chipotle simply continued its winning ways, the market responded by rewarding it with stupendous returns. It has returned more than 150% since we bought it at the bottom of the bear market in March 2009.

The lesson here is timeless, and one we never forget at Motley Fool Hidden Gems. 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 more than 100% over the past year and a half, after having dropped at least 20% in the previous six months. And you usually come up with few.

Do this now, and the dates coincide with our major market panic, and you get thousands of examples of opportunities for outsized rewards. Here are a few of the more familiar names, spanning industries as varied as high tech and hot pizza.

*As of Nov. 21 and May 21, respective years.
Screening and data from Capital IQ, a division of Standard & Poor's.

Lessons learned
As I mentioned, the bargain list is backward-looking and includes one of the biggest stock market panics in history, but I don't think that moots the message. Sometimes, Mr. Market sells everything too cheap. Sometimes, it's just a handful of stocks.

So, 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. 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. Macy's under $10 a share a year or so ago? Probably an easy observation. But a small, fast-growing apparel seller like lululemon? What's that worth?

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 look 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. Such as this latest dip. In fact, we recently announced our intent to put more money to work in the market in a couple of our favorite new ideas. If you'd like to take a look at what we find cheap, and why, a free trial is on me.

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

 Seth Jayson is co-advisor at Motley Fool Hidden Gems. At the time of publication, he owned shares of Chipotle, but had no position in any other company mentioned here. View his stock holdings and Fool profile here. Autoliv and Chipotle Mexican Grill are Motley Fool Hidden Gems recommendations. Chipotle Mexican Grill is a Rule Breakers pick. Ford Motor is a Stock Advisor recommendation. Motley Fool Options has recommended a covered calls position on Autoliv. The Fool owns shares of Chipotle Mexican Grill. Fool rules are here.