Why Good Things Happen to Bad Stocks

In my previous blog post for the Arizona Republic on July 22nd, I wrote about the importance of looking for value by going against the Wall Street majority. I also introduced my “Intelligent Investing Rule #2: Avoid the temptation to follow the crowd.  Stick with what you know and look for value.”  (For the full blog post, click here:  “What to make of the current bull market.” )

The example I cited was Apple Computer.  I wrote:   “Consider the table pounding to buy Apple Computer (AAPL) when it briefly traded at $700 last September.  The stock currently trades at approximately $426 after dipping below $400 and it is close to impossible to find a bull on the stock, though everyone loved it at $700.”  The post went on to discuss the cheap valuation AAPL carried at $426–the stock was trading at 9.9 times 2014 earnings compared to a price/earnings multiple of over 15 times for the S&P 500.  In other words:  not a lot had to go right for Apple to become of interest to investors.  That is often the case with great companies when their stock is acting badly.  Good things happen.

Since then the stock has appreciated slowly but surely, a nice climb out of the price trough the stock had been wallowing in.  But today legendary investor Carl Icahn announced a position in the stock.  Apple is up another (approximately) $22 today to over $489.  Icahn has been nibbling away (perhaps the reason for the slow, steady appreciation) and now that he has announced his holding in the stock, Wall Street investors are jumping in.  The company hasn’t materially changed since late July.  Rather, a badly performing stock of a great company finally caught the eye of Wall Street.

As value investors we want to already be in position when Wall Street becomes interested.  We want to be nibbling away at the bad stocks of great companies before the crowd charges in.

That is essence of my Intelligent Investing Rule #2.  Pay attention to great companies who are currently out of favor.  Remember to buy what you know and look for value while Wall Street is looking the other way.  Inevitably, my thirty years of market experience proves that good things happen to bad stocks because investors eventually pay attention to cheap stock valuations, just as Icahn has with Apple.  And when they do, they will take a Wall Street size bite.

That’s how to make money in your portfolio over the long-term.


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