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.

Read the full story and get access to the Real Money Pro trading floor.

There’s no substitute for a trading floor to get great ideas, so Jim Cramer created a better one at Real Money and blogs there exclusively. We then added legendary hedge fund manager, Doug Kass, with his exclusive Daily Diary and best investing ideas. Staffed with more than 4 dozen investing pros, money managers, journalists and analysts, Real Money Pro gives you a flood of opinions, analysis and actionable trading advice found nowhere else, and allows you to interact directly with each expert.

Already a Subscriber? Please login.

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.