Just because the stock’s dropped doesn’t mean the company’s out of the game. Here are some tips on picking the winners and recognizing the losers amidst a troubled market.
Is the problem temporary or long-term?
There are many companies that aren’t worth buying at any price. Trash is trash, regardless of how much you pay for it. In some cases, problems arise that are the result of one-time mistakes on the part of management.
Is the business an excellent business with a suitable market capitalization?
As always, you should be interested in non-asset intensive businesses with high returns on equity, little or no debt, operating in non-commodity type industries without fixed cost structures.
Does management have an excellent track record?
If a company has encountered significant problems for consecutive years while the industry in which it operates prospers, it is likely that management has been unwisely retained.
Are you financially able to wait out the storm?
If there is even the slightest chance of a forced sale due to a personal need for cash, don’t even think about buying the stock. “But it’s a wonderful investment opportunity!” you may protest. Yes, it may turn out to be one of the best investments of your life. However, if you do not have the luxury of waiting for the company’s intrinsic value to be reflected in the share price, you are gambling.
Buying on Bad News – Acquiring Undervalued Stock – [About.com]