The Poor Investor – Investigatory Value Investing

"Faber est suae quisque fortunae" -Appius Claudius Caecus

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Where to Look for Opportunities

In light of the recent plunge in Green Mountain Coffee Roasters’ (GMCR) share price, I thought it rather fitting to talk about where to look for opportunities in the stock market.  In my opinion, there are always opportunities out there.  Sometimes they’re hard to find, such as Vermillion, sometimes they’re right out in front of you, such as GMCR.  However, the real crux of the situation lies in deciphering whether they’re good opportunities, like buying shares of BP after the spill turned out to be, or bad ones, like buying shares of Kodak.  In choosing one versus the other, I’ll leave that up to you.

So just where do we find opportunities in the market?  Well, the question may not always be best posed as “where,” but instead, sometimes, as “when.”  The easiest when to look for opportunities is during a bear market, like the one that just occurred in the 2007-2009 period.  During this time, untold numbers of stocks were dirt cheap.  Berkshire Hathaway, perhaps one of the safest investments (perhaps even safer than US treasuries) was selling at nearly half of today’s price.  Another when is during a period of extreme panic or distress for an individual company, such as is the case of the aforementioned shares of GMCR, BP, and EK.  Even whole industries succumb to such malaise from time to time.  Coal, for example, is one such industry; shares of Peabody Energy Corp. and Arch Coal could prove to be bargains at these prices.  During a company’s turnaround also provides another when for shareholders looking for opportunities.  Successful turnarounds such as Ford Motor Co. and Nautilus Inc. (chart) come to mind here.

Sometimes market opportunities are pretty obvious.  Look for companies that are buying back their shares.  Warren Buffett bought IBM while it was reaching new highs partly due to the company’s diligent use of capital to buy back its own shares.  Look for companies trading below book value, below sales, with high dividend yields, at low price-to-earnings, low price-to-cash flow, near current company cash levels, and those growing at high returns on capital.  Current stocks that fall into some of these categories are names such as Hewlett-Packard, Chevron, and Exxon Mobil.  Companies on the verge of merging and those that are going private may also provide more obvious opportunities for investors.  US Airways, on the verge of a merger with American Airlines, could provide one such opportunity.

Sometimes the opportunities aren’t so obvious.  Companies that are on the bleeding edge of technology or the verge of new breakthroughs are of this type.  Vermillion, for instance, shot through the roof when it received FDA approval for its OVA1 cancer test.  Dendreon (DNDN) also saw its shares soar after receiving FDA approval for its cancer drug, Provenge.  In these instances, knowledge is your most important ally.  If you had followed the latest cancer research, as well as all the companies involved, with extreme dedication and focus, you may have also uncovered these opportunities.  Although these types of stocks can be found in any type of market, healthcare, biotechnology, cloud computing, and energy are some of the more common ones at this time.  Other less-than-obvious opportunities come in the form of companies exploring for vast natural resources or those that are highly leveraged, though these, especially the latter, require shrewd calculating as to what really is the risk-reward and whether or not its favorable.

The opportunities in the stock market are nearly limitless.  It all depends on the level of involvement you are willing to have to unearth them.  The list above is not nearly as exhaustive as it could be but hopefully serves as it was intended, to give you an idea of how to think about where to find market opportunities.  Don’t limit yourself to the obvious, as Ken Fisher says in his book, The Only Three Questions that Count, “Go crazy. Be creative. Flip things on their heads, backwards, and inside out. Hack them up and go over their guts. Instead of trying to be intuitive, think counter-intuitively—which may turn out to be way more intuitive.”  Sometimes finding opportunities means knowing where not to look just as much as knowing where to look.  And lastly, don’t mistake an opportunity for a good investment, only invest when the risk-reward is in your favor.

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