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Answer:
Dear
Michael,
There
are several specifics to look for when picking stocks
that are being overlooked by investors. And, if you
find one that eventually turns around and becomes
in favor again, you have the possibility of increasing
the worth of your portfolio.
CAUTION:
However, I strongly urge you to maintain a diversified
portfolio -- one that also contains solid blue
chip stocks, utilities
and perhaps some REITs.
The old protective guideline -- diversify to reduce
risk -- certainly holds true in this situation, as
in many others.
Five
Steps For Finding Out-Of-Favor Stocks
(1)
Watch and listen to the news
Every
evening pay close attention to radio and TV coverage
of the market. These broadcasts list the names of
companies in trouble as well as those whose stocks
have dropped in price. "Trouble" may be a decline
in quarterly profits, the sudden resignation of the
CEO or COO, a significant scandal about one or several
members of the management team or the dramatic failure
of a product or service.
The
following morning, add to your research, by reading
coverage in the morning newspaper, especially the
Wall Street Journal and Investors'
Business Daily.
Then,
assemble and keep updated a list of five to ten such
stocks.
(2)
Do Your Research
Once
a stock is on your watch list, get a copy of its annual
and quarterly reports. And check to see if it is covered
in Value Line Investment Survey, a weekly
independent research service that evaluates major
stocks. (Copies are available at most libraries.)
You
want to make certain the company has sufficient cash
flow, so that after it addresses the reason(s) it's
fallen out of favor -- which may mean paying off its
debt, boosting its research and development, consolidating
or changing its marketing plan -- it can still has
enough funds to operate in a healthy fashion.
Obviously,
the more cash flow a company has available, the more
it can afford to address internal problems and make
the necessary changes.
(3)
Look At Management
If
a company has fallen on hard times, it may need new
ideas, new leadership, new skills. Very often, a company
turns around in the long term because the Board of
Directors has brought in new people at the top.
(4)
Assets For Sale
If
the firm as several assets that are no longer useful
or no longer needed, this is a positive -- it signals
a cash-generating opportunity.
Some
assets, such as a little-known subsidiary of an equity
interest in another company, are known as "hidden
assets." You'll find these listed in the financial
statement.
(5)
Payouts
I
like companies that pay a dividend. Even out-of-favor
companies. Paying a dividend doesn't guarantee a successful
turnaround, but it does mean you'll receive some income
while you're holding your shares waiting for that
wallflower to turn into a dynamic beauty.
Bottom
Line:
Keep
in mind that out-of-favor stocks rarely rebound quickly.
Be prepared to hold your position long term. If you
panic and sell too soon, you have no possibility of
reaping a gain. Proceed with care and caution.
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