I have to admit, I'm more of a high-growth investing type by nature. I prefer the stocks that generate excitement and hold the allure of growth in a new or disruptive industry. I guess that's why when Philip Durell, the guru behind Motley Fool Inside Value, recommended MCI
I'll tell you why I had such a negative reaction. For starters, it wasn't long ago that MCI was cloaked in scandal. I tend to reject telecom stocks, anyway -- the industry has been in so much flux recently, and a few companies (like MCI) have faced outright scandal. I must admit: MCI, an unloved company in an unloved industry, was not a stock I would have touched.
And those feelings, of course, are exactly what value investing relies on -- investors who adhere to the value philosophy love unloved stocks in unloved industries. The next thing I knew, those folks who followed Philip's advice had locked in 40% gains, and Qwest
The moral? While there are many different investing philosophies -- and most investors tend to put themselves in one camp or another based on their own predispositions -- sometimes it pays to explore a style that you might not be innately designed for. It's hardly an unattractive idea to seed your portfolio with some choice stocks that have been overly punished by the marketplace.
Fishing for value
When it comes to cheap "value" plays, you might have a variety of negative thoughts that naturally come with the territory. "You get what you pay for" or "It's cheap for a reason" come to mind. Also, many individual investors are probably still recovering from the ugly investing lessons of the last recession. When the once-mighty market plummeted, think of how many people were going in willy-nilly to buy up stocks in big, well-known companies, thinking they were getting them at "values" or "bargains" -- only to watch those stocks continue to plunge.
And therein lies the rub -- how does one find out the difference? Inside Value's Philip Durell often gravitates toward companies that have gone through some sort of transition many of us might find distasteful -- profitability trip ups, Chapter 11 bankruptcy, or even accounting problems that have brought on SEC investigations, for example. He jumps in when the public perception remains negative -- yet the company is really getting back on its feet, with debt wiped clean, or a change in management, or the like.
It's easy to imagine that the public attitude toward a company would take a lot longer to improve than its financial statements. Think of some of the biggies, companies that have turned investors off only to turn around. Go back to 2003, when blue chippers such as Home Depot
Battered, bloodied, dull, underestimated, or forgotten
And that's just a sampling of the stocks that Inside Value investors hunt for. Ever hear the old adage to buy when blood is running in the streets? That's certainly a tactic. Or value investors will search for once-glamorous -- but still solid -- companies that have now lost their luster with the general investing population.
Once you come up with a company that you think might be a contender, you can exercise a tool that comes free for Inside Value subscribers -- a discounted cash flow (DCF) calculator. If the words "discounted cash flow" make your blood turn cold because you feel that you're not "qualified" enough to make such a calculation, the DCF calculator will help you with the requisite math -- you just plug in the numbers and go. You can get a good initial valuation for a stock, which in turn helps you decide if you want to further investigate the company.
Further investigation can turn up some brutalized stocks. A good example of a stock that has recently been pummeled is Eastman Kodak
The fine art of value hunting
Of course, hitting a new 52-week low is not a good reason in itself to buy a stock -- loads of stocks hit new lows for perfectly logical reasons, and investors should think long and hard before buying them. However, carefully watching such stocks and waiting for signs of a turnaround -- in other words, waiting for the moment where public opinion may still be negative despite a real reversal of fortunes -- is the key.
Personally, I'd be a little worried to go at this kind of investing approach alone. But with Inside Value, you don't have to go solo. Philip tracks attractive value stock prospects, with a monthly rundown of stocks on his watch list. He outlines at what price he'd buy them given their level of risk or reward. He recommends companies that many investors likely ignore in favor of more attractive, well-publicized, story-stock sirens. And he identifies stocks with appropriate margins of safety.
If you spot a potential value play, not only can you run it through the DCF calculator to figure out its intrinsic value and a decent price at which to purchase, but you can also run your ideas past the smart people on the dedicated Inside Value discussion boards, a friendly bunch who are well versed in the art of picking up bargain-basement stocks.
I've found it fun and informative to peruse the Inside Value site and read up on the value side of things, discovering not only good ideas that are vetted on a regular basis but a vibrant community of thinkers. If you're curious if this is an investing philosophy for you, take a 30-day free trial and get to know Philip and some of the Fools who are out to spot the bargains.
To read more about the Inside Value philosophy, check out:
- Philip Durell discusses his means of finding dirt cheap dream stocks.
- Can your wife give you a three-bagger?
- Sometimes, you can profit from a bankruptcy.