Oh Whacking Day!
Oh Whacking Day!
Our hallowed snake skull-cracking day!
We'll break their backs
Gouge out their eyes
Their evil hearts we'll pulverize!
Oh Whacking Day!
Oh Whacking Day!
May God bestow His grace on thee.
(Sung to the tune of "O Tannenbaum.")
-- The Simpsons

In April 1993, the world (or at least those who watch The Simpsons) was introduced to a new holiday, Whacking Day. According to folklore, the town's founder, Jebediah Springfield, had driven snakes into the town square in 1775 and then clubbed them to death. In commemoration of that event, every year on May 10, the people of Springfield, well, whack snakes.

In the episode, Lisa Simpson, the conscience of Springfield, was appalled at the tradition, as was visiting singer Barry White. Her brother, Bart, noticed a historical discrepancy and revealed that folklore had it all wrong and that the holiday was actually devised as an excuse to beat up the Irish. Lisa lured the snakes to her house with the help of Barry White's singing, and a happy ending ensued. Phew!

Whacking Day investing
So what does this not-so-heartwarming tale have to do with investing? Well, if you think about it, we often treat companies and their stocks like Springfield's snakes. We deride them and beat them up, when maybe we should do the opposite.

In fact, you can profit by inviting stocks that are getting whacked (the right ones, of course) into the sanctuary of your portfolio. Read on, and you may find yourself inspired to give some snakes a new home.

Charming snakes
Take a very popular stock in the late 1990s, Amazon.com (NASDAQ:AMZN). In March and April of 1999, the stock hit a split-adjusted high of $86. But then someone let the air out of the Internet balloon. In 2000, the stock fell into the $20s before hitting $5 or so in 2001. That was a long way to fall. Was the stock overvalued in 1999 at $86? Most likely. Did it deserve to trade in the single digits in 2001? Probably not. Since that low, the stock has increased eightfold. It's still well below $86, but anyone who invested in the past years and hung on has probably made a pretty penny.

Of course, everything is generally clearer in retrospect. We held shares of Amazon.com in the real-money Rule Breaker portfolio that we ran back then, but when the stock was trading around $15, we weren't enthusiastically urging anyone to buy shares. More importantly, we were looking carefully at the company and its management, assessing how well the company was doing the things it needed to do ... like become profitable.

Another serpentine company is Altria (NYSE:MO), formerly known as Philip Morris. (As a favorite joke of mine goes, after Philip Morris changed its name to Altria, lung cancer changed its name to Philip Morris.) It's been out of favor with many investors for a long time due to some of its products, which are seen as unsavory. It's also been under a cloud of litigation. The result? A depressed stock price. Its price-to-earnings (P/E) ratio, last time I checked, was around 16, versus 22 for Procter & Gamble (NYSE:PG), another huge consumer products company, and 19 for Kellogg (NYSE:K). But those investors who decided to be contrary, and who invested in Altria in the past year or two, have likely done quite well. Over the past year, the stock has gone from around $60 per share to around $80. Its dividend yield is down to about 4%. This snake rewarded those who gave it shelter in a storm.

Note that looking for firms with relatively high dividend yields is a good way to unearth some reviled firms. When a stock's price falls, its yield rises, due to simple math.

Invite the snakes home
In our investing newsletters, the concept of an underdog with potential is a frequent theme. Our Inside Value newsletter turns up many beaten-up stocks in its quest to find compelling undervalued companies. Last November, for example, lead analyst Philip Durell recommended Omnicare (NYSE:OCR), a Kentucky-based provider of pharmaceutical distribution services for nursing homes. Here's how he described the company:

"[It] has used an acquisition strategy to fuel its growth in a fragmented industry. In the last five years, sales have doubled and net income more than tripled. Today, Omnicare has a 37% market share, and just over a million beds under management....

"Now for the really good news for value investors: Earnings for the second quarter missed the company's own guidance, and Omnicare lowered earnings-per-share (EPS) expectations for the full year 2004 by around 20 cents, to a $2.35-$2.45 range. The stock price plummeted by 30%.

"Let's think about this for a moment. The stock plunged 30% (now down 41% from the year's high) despite the fact that EPS is expected to increase by 20% or more for all of 2004. At today's price, the shares are trading at a discount of about 28% to my estimation of intrinsic value."

Philip saw the stock as undervalued by at least 28%. Well, about a year later, he recommended selling it -- for a gain of 101%! Do things always work out this well with all "snakes" in the investing arena? Of course not. But if you take the time to do a lot of research, as Philip and his team do, you can considerably increase your odds of doing well. In less than a year, Philip has made roughly 40% on Intuit (NASDAQ:INTU) and 35% on GTECHHoldings (NYSE:GTK).

Inside Value is constantly on the hunt for more such companies. In its most recent issue, it highlighted a major, well-known apparel retailer. Will it double our money in a year or three? Time will tell. If you take advantage of a free trial of the newsletter service, you'll be able to see which retailer Philip chose -- you'll see all our recommendations, in fact, as well as how they've done. You'll be able to poke through lots of back issues, too. Give it a whirl!

Selena Maranjian 's favorite discussion boards include Book Club, The Eclectic Library and Card & Board Games. She owns shares of Amazon.com . For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . Amazon is a Stock Advisor pick. The Motley Fool isFools writing for Fools.