How to Catch a Falling Knife
As I write this, my place in Miami is being buffeted by 30 mph winds and steady rains -- courtesy of Hurricane Isaac, which is passing to the west. The weather has been dreadful this weekend and my golden retriever has cabin fever at this point, but tomorrow should bring a beautiful sunny day. As a contrarian investor, I find this a useful analogy about a lucrative strategy I use to pick up out-of-favor equities whose stock prices have fell drastically, but which also have sunnier days ahead.
The trick to this sort of investing is avoid firms that have a broken business model, such as Dell (DELL), or have had their market share permanently lost to nimbler competitors, for example, Research In Motion (RIMM). When I want to make these sorts of cyclical bets, I look for three things besides cheap valuations. (A) I want the company's revenues to be still growing as it is easier to address poor margins than a contracting market space. (B) I find it helpful if the beaten down shares have some sort of technical support at the current price level. (C) Most importantly, I want to see recent insider buying in the shares. When I am researching stocks, I am always amazed by how many stocks I find that have had big moves after long declines, which have insider buying near the nadir of their descent....342 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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