The Walrus.biz

Investing like a vulture: buying beat up stocks

In 1964, a young investor by the name of Warren Buffet realized something that would eventually make him incredibly wealthy. A fairly large company by the name of American Express was going through a significant scandal that battered its stock price. Investors were losing money and it was considered a deadbeat performer. Warren Buffet, however, was waiting on line at a local store and noticed a couple of people ahead of him using their American Express cards. He asked the cashier, “Have you noticed people using their AMEX cards less”? “Not at all”, he replied. That’s all he needed to hear. He bought a large amount of shares and patiently waited for the stock to recover. It was undervalued, he argued, and the drop in stock price was a gross over reaction to an internal problem that had no effect on profit.  Years later his investment paid off. It was the first example of Warren Buffet buying undervalued, under appreciated stocks.

Fast forward to 2005. Merck, already down from a rough year in 2004, gets hit with a scandal regarding Vioxx. Its stock price went from a high of 64 to a low of 27. It lost over 50% of its stock price at the time. I was paying close attention to it at at the time and I was pointing out to my friends that it was to be strongly considered. They thought I was crazy! With looming lawsuits and a loss of revenue, how can someone make this case? It was simple. The decrease in stock price was not comparable to the more modest decrease in revenues. I bought the stock at $33 in early 2006 and sold it at the end of the year for $42. It was a substantial gain. Looking back, I could have made more. The stock doubled within two years of its low in late 2005.

That brings us to today. Who is getting “beat up” now, and what stock price is dropping more than it should? I’m taking a close look at the major banks who have been writing off huge amounts due to the sub prime mortgage crisis. Many of these banks are still in the black, barely making profits, yet still trending downwards in their stock price. Why? Future expectations and a poor understanding of market forces. I’m paying close attention to these companies and their core businesses and whether or not they are doing well without including the one or two time write offs they are experiencing. My belief is that these companies will have a strong rebound. Citigroup, for instance, has lost over 50% of its stock price in a little over a year. For what? One quarter of record losses which followed 4 or 5 years of record profits. All write offs it experienced and the money it lost in the process was recuperated through foreign capital and the company still holds assets of close to 2 trillion dollars in which to garnish profits from.

So I’m making a prediction here. I’m betting on the belief that the big banks who have been battered lately will begin to go up this summer and will rebound to an equilibrium within two years. I’m not only making a prediction, I’m putting my money where my mouth is. I have transferred a respectable amount ($5,000) to my brokerage account for the purpose of investing in one or two of these stocks. And in two years time, I will link back to this blog to see how my prediction held up.