On Nov. 16, Sears Holdings (NASDAQ:SHLD) announced decent and growing earnings that nevertheless failed to live up to the market's expectations. The previous day, I had warned that the market tends to punish companies that do that. Coincidentally, I'd mentioned Sears as an example of a company priced based on its expected growth. And sure enough, Sears' core earnings didn't grow as quickly as the market had expected. Just as that value investing theory predicted, Sears' shares sank on the news, falling about 5.5%.

I got lucky with my timing. Nobody can effectively predict when a company like Sears is going to stumble. If you've invested long enough, though, you'll realize that every company slips from time to time. Even diversified and dominant behemoths like General Electric (NYSE:GE) can see their shares tank. In GE's case, earlier this decade two of its normally unrelated business units got sucker-punched almost simultaneously: The power turbine business got tripped up by the energy-market-distorting effects of Enron as its aircraft engines division suffered through the travel slowdown after Sept. 11, 2001.

Keep your eyes open
The problem for us mere mortals is that without a working crystal ball, we can't predict the future. We don't -- and can't -- know when a company is going to miss its estimates, grow below expectations, flub its inventory accounting, or otherwise manage to throw Wall Street for a loop. What we do know, though, is that:

  • No company is immune to problems
  • The market will punish those that stumble

While you may not be able to predict the future, you can react to the past. If you see a solid company whose shares have plummeted to well below where they should be on temporary bad news, that's your time to buy. To value investors, it's the equivalent of a home run slugger seeing a juicy pitch right in his power zone. To be prepared to pounce, though, you've got to know in advance what companies you'd be willing to buy if the price is right.

That's why having a watch list serves value investors so very well. Any serious investor will research a firm before buying it. From time to time, you will come across businesses you'd love to own but whose price tag keeps you away. As I've previously mentioned, I view Starbucks (NASDAQ:SBUX) as just such a company. Having done my investigation and come away impressed with the business, I would be happy to snap its shares up -- if I could just justify the price. But I can't, so instead of being a current Starbucks shareholder, I'm simply watching it from afar, prepared to pounce when the opportunity presents itself.

Use your watch list
Of course, having a watch list is only useful if you plan to do something with it. At Motley Fool Inside Value, several of our current picks started out on our watch list. Once their shares became attractively priced to buy, they graduated to official pick status. To beat the market as we have, you need to not only buy the right companies but also pay the right price. Consider the recent fate of these companies whose businesses looked strong enough to land them on our watch list but whose shares were too pricy to be worth buying at the time:


Watch List Price

Recent Price


Tuesday Morning (NASDAQ:TUES)




Ryland Group (NYSE:RYL)




Boston Scientific (NYSE:BSX)




Pier 1 Imports (NYSE:PIR)




They've each suffered double-digit losses since being uncovered. Since they sat on our watch list, though, rather than being a painful drop they provide a perfect opportunity to go back and look to see if they're attractive enough to buy at a better price. If you want to be able to swing at fat pitches, you've got to know when one comes around.

Knowing in advance what companies you want to buy and what prices you're willing to pay will let you recognize and take advantage of a genuine fat pitch when it's lobbed in your direction. Join us today to start taking batting practice and working on your home run swing.

To find out which former Inside Value watch list stocks became such great bargains as to be completely irresistible, start your 30-day free trial here.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of General Electric. Starbucks is a Stock Advisor recommendation. The Fool has a disclosure policy.