Investors are groping around for the market’s bottom. We won’t know if they’re right until it’s a lot higher but that’s not a good reason for turning our backs on companies. In fact, investors should be scrutinising them closely.
How can you tell the difference between a company getting into trouble, and one getting out of it? It’s an important question for investors who try to buy shares on the cheap, when the price is low relative to the value of the company’s assets or earning power.
Typically, these companies are financially distressed. Profitability may be falling or negative and they may have to raise money just to keep going. They might not sound like good investments, but turnarounds can earn investors extreme returns when previously investors had written them off.
Wagon (WAGN) was the cheapest stock of all last month judging by its Naked PE ratio. You can buy Wagon shares for less than the profit that it makes in an average year. When investors place such a tiny value on a company's earning power they doubt it will survive on the stock market, so why waste time on it?
Yesterday Wiley, the book publisher, sent me a flyer entitled "Keep your Cool in the Credit Crisis". It was promotional blurb on eight books that promise to help, including two from the 'For Dummies' range. The 'b side' lists eight 'Crash Classics'. When publishers bring out 'Credit Crunch for Dummies' books*1 and 'best of' compilations you know things are going to get better :-)
Forgetting all the economic noise and looking at valuations, good companies are getting cheaper.