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Investment Bargain Hunting 18th October 2004 High-flying stocks fall on hard times more often than you might think, and some of these prove to be very good deals. Here are five steps to help identify attractive bargain-bin opportunities. 1: Look for companies with low market capitalisations. By focusing on smaller companies, you increase potential returns, because smaller stocks tend to grow more quickly and those which fall on hard times rapidly lose institutional support. This selling pressure often drives the price down artificially low, thus creating exciting bargain opportunities. 2: Look for companies trading at significant discounts to their recent highs. Significant means 50% or more. Make sure that the weary investors have been shaken out of the stock. Just because the stock has tanked doesn’t necessarily mean the value behind it has evaporated. 3: Look for companies with a P/E ratio well below their competitors. Specifically, we are looking for companies with P/E ratios well below their industry average. These companies will have maintained solid earnings during their decline and may represent strong upside potential. 4: Look for companies with an EV/FCF/Growth ratio less than 0.75. As a general rule of thumb, companies with an EV/FCF/G ratio under 1 are attractive investment opportunities. But let’s add in an extra margin of safety and only consider companies with an EV/FCF/G ratio less than 0.75. 5: Look for companies with a competitive advantage in an industry you understand. How is the company addressing its challenges? This research should arm you with a basic knowledge of what’s going on with the company, how serious the problems are, and what steps the company is taking to address them. Finally measure your knowledge of the company’s target market - your observations and experiences can provide valuable insights into where the market is going. SOURCE: www.themotleyfool.com |
©2004 The Main Report Ltd