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Editorial Note: Ian Wyatt just published his latest issue of $100k Portfolio – featuring a financial stock that's been crushed by bad news. The sell-off has created a rare opportunity to generate outstanding total return. Ian believes these types of “hated” investment are something every serious investor should consider. So this week, we’re sharing our best essays on why you should love what everyone one else hates.
There are basically two type types of companies: Ones that have trouble and ones that will have trouble.
Most investors prefer the latter. I prefer the former.
The latter – those that will have trouble – are frequently priced for perfection: Apple Inc. (NASDAQ: AAPL) in 2012, Cisco System (NASADAQ: CSCO) in 2000, and Microsoft (NASDAQ: MSFT) in 1999 are ready examples.
All three were once believed immune to trouble. Their immunity was reflected in their high share price.
Of course, they weren't immune. When trouble hit – and it always does – their shares were quickly repriced for imperfection. To this day, none of the three trades close to its former “perfection” price.
Countless examples abound of investors buying “will have trouble” companies, and paying dearly for their folly.
Over the years, I've inured myself to the imperative to pay for perfection. Like Ian Wyatt has done in the latest issue of the 100k Portfolio, I seek companies that have trouble. Trouble imparts value.
The share price of troubled companies frequently drop to unreasonable levels, thus creating opportunity. Management wrangles through the issues or the issues resolve themselves. In time, investors realize the trouble is surmountable, fear abates, and the share price moves higher.
Rational thinking, sound analysis, and a contrarian demeanor are key. Ian has applied all three to the “troubled” company he recently added to the 100k Portfolio. I expect investors will soon enough reap rewards for buying at today's “imperfection” price.
I speak from experience. High Yield Wealth readers also have reaped the rewards of buying into troubled recommendations.
Omega Healthcare Investors (NYSE: OHI) is one. Two years ago, few investors wanted to own this long-term care REIT. Unrelenting chatter that government payments would be slashed was the trouble that kept investors away.
Omega's shares were depressed; priced for imperfection based on years of expected trouble.
But even a cursory analysis revealed the majority of investors were wrong. The trouble was exaggerated. Omega has subsequently returned over 65% to the High Yield Wealth portfolio.
Many High Yield Wealth readers reaped additional gains in Total SA (NYSE: TOT), whose shares experienced an unreasonable sell-off over a gas leak in the North Sea. Altria (NYSE: MO) shares were unreasonable sold over fears government would impose macabre warning labels on cigarette packs.
A rational analysis showed investor reaction was extreme in both instances. Total has since returned 30% and Altria 38%.
The majority of investors prefer to pay the “perfection” price. Ian and I prefer to pay the “imperfection” price. I expect 100k Portfolio readers will soon reap the rewards of paying the “imperfection” price with this latest “troubled company” recommendation.