I know I'm privileged. As a Fool writer, I get to access all seven of our impressive newsletters for free. I can peer into each of their scorecards -- just about all of them maintain scorecards, featuring every pick made -- and can see at a glance how well the various recommendations are doing. Often, the recommendations that are currently underwater are in red.
When I'm looking for stocks or mutual funds in which to possibly invest (in compliance with Fool rules, of course), and I scan through our recommended investments, I confess that an inclination of mine is to ignore the ones in red and zero in on the ones that are up by 30%, 60%, 200% ... you get the idea. But that's not necessarily the best thing to do.
An important point I occasionally have to remind myself of is that the recommendations in red may be the best bets.
You can peek, too
Before I continue, though, permit me to point out that you can access our newsletters' scorecards, too. Simply take advantage of a free trial, and you'll immediately have full access. You'll see all the new picks and all the past picks, plus you'll be able to read various special reports and features.
Peering inside InsideValue
Let's peer inside one of our newsletters now, shall we? Our Inside Value newsletter, headed by Philip Durell, has made 26 recommendations as of this writing. About 20 are in the black (well, green, on our online scorecard), and six are in the red. Eleven have double-digit gains, and five have gained 40% or more.
Here's how we might think about the securities in red: When they were recommended, Philip considered them significantly undervalued, and worth investing in, because there was a strong likelihood that they would appreciate well. Right now, they're trading at a price below the one at which they were recommended. Does this mean that Philip screwed up? Not at all. Though, of course, I fully expect him to screw up on occasion -- even Warren Buffett screws up, on rare occasions. The beauty of getting advice from someone like Philip is that he's likely to screw up to a lesser degree than I would, because he's a savvier investor and one who spends a lot more time studying companies than I do.
As you know, stocks never move in a straight line. Look at venerable Coca-Cola (NYSE:KO), for example. Here are its closing prices over a few days last month:
- Aug. 10: $43.90
- Aug. 11: $44.11
- Aug. 12: $43.58
- Aug. 19: $44.39
- Aug. 26: $43.57
See? Up a bit, down a bit. At some point it will make a stronger move, advancing significantly more than it retreats over a period (or vice versa!). Many stocks are much more volatile than that, too. So accepting the fact that stock prices will often fluctuate up and down within a relatively narrow band for a while, it's reasonable that any recommended stock will be underwater for a while -- until a catalyst kicks in, such as a new product launching, strong financial results being reported, or perhaps extra media attention.
Making sense of red and green
While I may be attracted by the 12% gain in Philip's June recommendation of AutoZone (NYSE:AZO), I should think twice before investing in it. Remember that stocks don't usually just keep rising without regard to their revenues and earnings. Back in June, Philip estimated the company's intrinsic value to be around $104 to $120. Well, trading at around $95 recently, the stock is darn close to that value already. He expected a price around $134 to $168 within three or four years. But getting there from his recommendation price of $85 will yield a greater return than getting there from a higher price. There's a reason why Philip recommended buying shares at less than $87.
Turning to those in red, there are two standouts -- Doral Financial (NYSE:DRL) and Fannie Mae (NYSE:FNM), each down by about 25% to 30%. Both have a cloud of accounting irregularities surrounding them, and that's not a great situation to buy into. But hold on -- look, Anheuser-Busch (NYSE:BUD) was recommended a few months ago, and it's down some 6%. As Richard Gibbons explained in his "How to Crush the Market" article, the company remains compelling:
[It] has almost 50% of the U.S. beer market. Anheuser's scale provides huge advantages against competitors. Its distribution network is unparalleled in the North American beer market, and it has the financial clout to expand outside the U.S. into markets like China. The company is likely to be able to continue to dominate its markets and grow for decades.
Philip estimated the intrinsic value of Anheuser-Busch at $62 per share and recommended buying in at prices below $50. He forecast the price to hit $80 to $100 in three to five years. Well, he recommended the stock when it was around $48 per share, and it's now around $45 per share. This looks like a stock worth considering and learning more about!
Outside newsletters
You don't have to rely on newsletter picks to look for strong companies that have retreated a bit recently and may present exciting buying opportunities. If you have the time and interest, just read broadly and pay attention. I recently noticed, for example, that Dell (NASDAQ:DELL), is trading near its 52-week low of $34 per share, with an unusually un-astronomical P/E of 28. That doesn't mean anyone should rush out and snap up shares, but it does warrant further investigation.
Sometimes great companies simply sputter a little, and these can present rare chances to jump aboard. One such situation that I noted, but failed to act on, was back in 1993, when I saw that IBM (NYSE:IBM) was trading in the low $40s after having been in the $120s just a few years earlier. Such a situation suggests that the company is either (a) dying a slow death, or (b) merely sick. I was an extremely unsophisticated investor at the time, but I thought to myself that the company had such a valuable name and had been such a powerhouse for so long that surely it would be able to get its act together. Turns out I was right. Investors smart enough to jump in then saw the stock in the $60s by 1994 and hitting $100 a year later.
Another good opportunity is one I did manage to snag. In July of 2002, Johnson &Johnson (NYSE:JNJ), a company I long admired, fell to the low $40s from the $60s just months earlier, the result of an announced investigation at its Puerto Rico manufacturing plant. To me, it seemed like the market had overreacted in cutting down the stock, so I pounced. I was soon sitting on a healthy gain.
The bottom line
The bottom line is that you can profit handsomely by seeking out strong companies that are facing some temporary, fixable challenges. In our newsletter picks and elsewhere, look for stocks that have fallen recently, and then dig around enough to determine whether the problems seem to be short-term or long-term.
Learn more in Chuck Saletta's article "Beat the House at Its Own Game."
Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library, and Card & Board Games. She owns shares of Coca-Cola and Johnson & Johnson. For more about Selena, viewher bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.
