For all intents and purposes, I might as well be deaf. My hearing is OK, but you'd think I'd react a little more when horns blare at me or my wife asks me to take out the garbage.
My investing ear could use a little tuning as well. Like many investors, I often find myself missing signals that great stocks are throwing off. I have no problem pointing out stocks that were a screaming buy ... a year ago. That's easy. But how about picking up on the clues of great stocks before they roar ahead and double or triple?
From a whisper to a scream
Great investors such as Warren Buffett and Bill Miller are venerated today because of their ability to ferret out successful companies at a great value. This may mean stocks involved in "special situations" such as the onerous tobacco lawsuits that depressed shares of Altria
But finding the great stocks also includes spotting situations where growing companies are priced below expected future cash flows, such as when PetroChina
Another great investor receiving a lot of interest these days for a style very similar to Buffett's is Mohnish Pabrai. His style of patient value investing, modeled after Buffett's, has earned his Pabrai Investment Fund a greater than 28% annual return.
In a recent interview with The Motley Fool's Emil Lee, Pabrai shared that he looks for stocks that scream out to him, "Buy me!" In looking at stocks he has picked, including Freight Car America
Or then again, maybe I just failed to hear it.
Now hear this ...
So what are some of these "screaming buy" traits that investors should be listening for?
- Companies in "distress."
- Companies that have strong, stable cash flows.
- Companies trading for below intrinsic value.
As mentioned before, while any number of situations can cause distress, the effect is the same -- shares are priced dramatically lower because of pessimism. If the company in question retains stable cash flows from predictable operations, you can calculate whether the stock is a screaming buy.
Tuning out the noise of media pessimism and listening for more fundamentally sound signals requires the discipline to remain idle. While some investors can certainly make a profit jumping in or out of hot story stocks such as Apple
While hearing damage is often permanent, investors can always refine their investing ear by trying to value companies that popular opinion seems to despise. (For a Foolish primer, read this article.) This is one of the methods that Fool value-investing guru Philip Durell uses to identify screaming buys, and his picks are beating the market by 5 percentage points on average.
Fool contributor Dave Mock hears more ringing in his ears than anything else. He owns shares of ExxonMobil. Dave is the author of The Qualcomm Equation. USG is an Inside Value recommendation. The Motley Fool's disclosure policy speaks softly but comes across clear as a bell.