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Buying Good Businesses at Cheap Prices


MIndyke's picture

By MIndyke - Posted on 23 June 2010

The focal point of buying shares in a company at a low price is to recognize whether any bad news impacts normal business operations. Bad news in the stock market happens at least once every day, meaning a new investment opportunity arises every day. 
 
A company’s downturn is most commonly the result of an economic recession, where demand for products and services tends to decrease. If the recession is due to the effects of a business cycle, then its stock is considered a good investment when the price reaches its trough. Events like changing seasons and Federal Bank actions create the fluctuations in the business cycle. If they favor the company in question, the earnings are likely to rebound since under the assumption that normal operations will resume and put the business near the business cycle’s peak. Department stores like Macy’s and Bloomingdale’s are companies that depend on business during the Thanksgiving and Christmas holidays, making them seasonal businesses. If the Fed raises the average consumer price to create inflation, businesses selling necessities are impacted, including pharmacies like CVS and Rite Aid.
 
A more challenging kind of bad news occurs when the company at question is involved in a one-time scandal or controversy that causes it to incur tort liabilities. When evaluating this scenario, extensive research needs to be conducted to determine whether the damages are temporary or permanent and short-term or long-term. Dig deep down for news reports, connecting implications, and the numbers that matter most in the company. Oil conglomerate BP is a recent classic example of this circumstance after being held responsible for the oil spill in the Gulf Coast two months ago. 
 
If the business is an established brand with a long history and loyal followers, then you have also found a golden investment opportunity if the stock price were to reach a new historical low. Companies like Pepsi and Sony would fit this scenario well as most consumers already use their products as a part of everyday life, which would make it hard for these businesses to declare bankruptcy in the event of a crisis. If a Pepsi or Sony is nearing an all-time low, the investment is yours for the taking. General Motors faced this scenario in 2008 and were bailed out by the government because a bankruptcy would have impacted everyday life for businesses and consumers significantly. 

To find good businesses at a cheap price, check out:
www.yahoo.com/finance - Look for bad news about stocks in featured headlines on the home page. If you want to pursue a company further, click on and skim the article, then type in the name of the company in the search box near the top left corner. On the Yahoo company home page, browse for news and info on the left side and utilize all the options under the “News and Info” heading. 

www.bloomberg.com – Market Data – Stocks – Click on one of the stock indexes and sort by price or % change to find bargains.

www.thestreet.com – Click on Cramer/Mad Money to track Cramer’s blogs with information about bargains, stocks to avoid, and future stocks to consider.  
 

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