Are all these hacks and corporate miss-steps creating buying opportunities??

Are all these hacks and corporate miss-steps creating buying opportunities??

I always get excited when there is a new buying opportunity on the market. I remember one time at work when i was asked “ what’s the best thing about pay-day” and I was the only one in a group full of spending-minded individuals to say it’s more money I get to put in my brokerage account and dead-silence came across the room. Thankfully some guy said “oh that's cool, what do you invest in”. At heart, I always tell people I am a value investor - I love looking out for value plays or stocks that have good foundations and backing behind them but have just hit a rough patch.

Recently, it seems that corporate missteps are becoming the new norm. A few weeks ago, Equifax - a credit bureau responsible for credit scores had their databases attacked resulting in the exposure of many client credit files, SIN numbers, addresses and birthdates. Yahoo - had a huge data breach a few years ago, followed by scandals at Wells-Fargo, breaches at Home-Depot & Target. These are just a few of them. At the end of the day however, all these companies are still good corporations. And by good - I mean that their products and services are still in demand and their corporate strategy for the most part remain unchanged.

This begs the question - are stocks a strong buy following a scandal, misstep or scare? The question is tricky because it involves market timing - a practice that nobody's perfect at. The problem here is that no one knows when the bottom will be and no one knows how long it will take for the company to regain its momentum, gain shareholders trust and build shareholder value.

Key Steps to identifying the opportunity.

  1. What type of situation caused the stock to drop in the 1st place?

It’s important to figure out what the root of the problem is. Was it a hack? Was it a scandal? Is it proven? These are all questions that will affect the downward movement of a stock. Usually hacks and scandals come with legal repercussions that can haunt a stock for awhile and result in a huge payout which will affect operating activities.

      2. Why are people selling?

The second indicator I like to look at - is why are people selling? Is selling driven by fear or by the fact that the company is in serious danger? If the latter is true - I would do more research before investing. If the former is true try checking to see if the stock is oversold. When a stock is oversold - it means that many people are selling far below the true value just to cut losses or get out of the game. Many of times this does create a good buying position - but with oversold stocks you never know when the stock will bottom out.

     3.  What does the stock’s history look like and do they pay dividends?

Finally, it's important to look at the stock’s history. How far did the stock drop? Remember as investors you have to be compensated for the risk you take on when purchasing stocks - what investors call the risk premium.  For example, if the stock’s 52 week high is 50$ and a news event makes it drop to 48$ - your potential gain if it returns back up is about 4%. Furthermore, exude caution with companies that pay dividends. If these companies run into troubles - they usually slash their dividends which a big red flag as some investors will hold the stock even during turmoil just for the dividend. When the dividend is cut - investors lose their incentive to hold the stock which creates more downward pressure through increased selling.

Pro-Tip: Just because a stock went down - does not mean that it will come back up. Sometimes what happens is a “dead-cat bounce” in which the stock temporarily makes a recovery only to drop even further as speculators try to cover positions. In other situations you may end up catching a falling knife. Just remember whenever you are buying stocks after major press events - be prepared to wait before the stock recovers. Your position may be in the red for some time as the company regains its footing.

Disclaimer: All of the above information is my own personal opinion. Please do your research and consult with a licensed representative before making any investment decision. Examples are for learning purposes only and are not to be used as investment advice.

Thumbail: WSJ

 

 

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