Buy Before It's Too Late
Buy Before It's Too Late
By Seth Jayson (TMF Bent)
So, I blew it. Again.
A few weeks back, a certain pharmaceutical firm tanked into bargain territory, and I missed out on much of the inevitable rebound by being too tentative with my purchase. No, I'm not going to tell you about that one (I'm still contemplating a buy, and I have Foolish trading guidelines to follow), but I will share with you a story about a similar situation that offers the same lesson.
When I first penned this article back in January, it was occasioned by my regrets about not buying shares of a steel company I knew to be a value, maybe even a steal. I'd done the research. I'd considered the odds. I thought the then-current share price vastly discounted the company.
The company I was talking about then was Wheeling-Pittsburgh, a steelmaker not to be confused with the likes of Nucor. We're talking about a tiny producer that dropped from $45 to $8 per share after it suffered the quadruple whammy of raw material supply problems, technical setbacks in plants and new furnaces, a tough steel price environment, and some trouble with loan covenants.
But while trouble is trouble, the stock traded down to a point where it was selling for about half of its tangible book value. Half! What's more, it looked as though survival was not only possible, but also highly likely. And in the event things went bad? Half of tangible book value? That's a heck of a backstop in the case of a fire sale.
I'd discussed all of this with Bill Mann, a very sharp Dumpster-diver who picked this one up off the 52-week-low list. He was generous enough to have shared the idea with me but also smart enough to have taken his fingers out of his nostrils (unlike yours truly) and purchased shares.
So what did I do? Hey, I figured there was no hurry. I figured I could afford to wait a bit and see how things progressed. Wrong!
The big jump
Shortly after I neglected to buy, Wheeling-Pittsburgh jumped a bit more than 50% -- some of the jump was unexplained, but some of it was directly following merger activity in the space. My theory was that given the acquisition derby these days, big money out there would be thinking it's time to buy up cheap steel. And that's what ended up happening.
The lesson here is timeless. Don't do what I did. Listen to the masters. Successful value investors from Buffett to Olstein have explained that you can't time the bottom and you can't wait for a catalyst. By the time that happens, it's too late. So when something's cheap, you buy it. If it gets cheaper, you buy more.
Over the past 18 months or so, I was sure I'd missed out on dozens of such opportunities. I was right. A quick screen of major
| Company | Original Fall | 18-Month Return |
| | (27.65%) | 338.49% |
| Savvis(Nasdaq: SVVS) | (58.62%) | 326.97% |
| Gymboree(Nasdaq: GYMB) | (20.54%) | 308.08% |
| Level 3 Communications(Nasdaq: LVLT) | (39.13%) | 229.17% |
| HarmonyGold(NYSE: HMY) | (41.96%) | 153.78% |
| PiperJaffray(NYSE: PJC) | (37.69%) | 148.23% |
| Atmel(Nasdaq: ATML) | (36.81%) | 128.7% |
Screening and data by Capital IQ, a division of Standard & Poor's.
The reasons for the returns vary, but any one of these would have been a real portfolio power, and to tell the truth, I'm embarrassed that I didn't own a single name in that list.
Lessons learned
If you take anything from this article, let it be the ability to recognize cheap. And if you find cheap, take it.
If you need some help recognizing what cheap is, or some courage in helping you take the plunge when you find it, Motley Fool Inside Value can help. It's not always the case that value is realized so quickly, but it never hurts to take a look at what's cheap. If you'd like to see what Inside Value is eyeballing, we've got a 30-day guest pass waiting for you.
posted by fundhouse at 7:52 AM
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