This post was originally published on October 12th, 2010. It was early days on the Ninja so the post didn’t get much traffic. However, this was one of my favourite articles, so I’ve taken the liberty to update and repost it. Old news is still news!
Bad News Investing is a term I use to define stocks that get hit with bad news or suffer a sharp decline in share price, due to an unforeseen event. I think this is one of the easiest ways to pick stocks as a Value Investor. You don’t always need to research the balance sheets of various stocks to find a gem – they come right to your doorstep. How? The business news is always looking to make headlines. All you have to do is have cash on the sidelines (or some nice income generating bond ETFs), do a little research, and buy in when a company on your watch-list gets hit with bad news.
The current volatility in the markets is your friend, it tells you exactly when to buy in – thanks to the media. When people hear bad news on a stock they panic sell, and the price moves down sharply. You don’t need to watch the markets on a daily basis. But keep your eyes and ears open for solid companies that do get hit with bad news, otherwise you are possibly missing an investment opportunity.
The key of course, is to stick with solid blue chip companies and do your best to make sure you’re not buying a lemon. You wouldn’t want to buy Blockbuster Video while it’s in Chapter 11 Bankruptcy, would you? So when a stock gets hit hard, research and due diligence goes a long way! You really have to make the decision at the time, based on what you know, are you buying a value-play or a value-trap? But if you are dealing with a large and established company, and a drop in share price is more to do with panic than fundamentals, you can make a nice profit!
Here are three examples of stocks hit with bad news in 2010, and where they stand now.
British Petroleum (BP)
BP needs no introduction due to its catastrophic environmental and economic disaster in the Gulf of Mexico. In April 2010 British Petroleum (BP) stock was trading as high as $62 US per share before the explosion aboard the Deep Sea Horizon platform. Everyone knows how this catastrophe resulted in 11 oil workers losing their lives, and how millions of gallons of heavy crude started spewing into the Gulf of Mexico. By mid July the stock had collapsed to $26.75 per share. BP assumed full responsibility and committed to all cleanup costs. But most investors felt the stock was a risk and BP would go bankrupt with all the impending law suits and future cleanup costs. BP took the prudent step of cutting it’s dividend on June 16th, 2010. BP also sold assets in August 2010 to recover some of the costs, which turned out to be a fraction of its global assets. BP was after all fiscally sound. By early August BP shares had increased to over $40 US per share.
A few months later, BP was trading at $41.26 US per share. If you had the moral inclination and stomach to buy the stock around $28 and sell at $40, you would have made a profit of $12 per share, a 42% return in two months. BP later reinstated a dividend of 0.07 cents per share on February 1st, 2011. The reinstated dividend was announced alongside BP’s full-year results, which recorded a $4.9 billion dollar loss, including a charge related to the oil spill of $40.9 billion. BP currently trades at $46.99 per share, up 56.9% from its 2010 lows. BP has a dividend yield of 4.10%, a dividend payout ratio of 32.9%, and a debt to equity ratio of 39.3%. (Disclaimer: I chose not to purchase BP in lieu of the events)
Shoppers Drug Mart (SC)
Shoppers Drug Mart (SC) is the cornerstone of the pharmaceutical retailer in Canada. Their business is primarily based on dispensing fees for pharmacy medications, pharmacy supplies, and convenience items such as cosmetics and snack food. Pharmacy sales, including the dispensing fee account for nearly half of Shoppers Drug Mart revenue. Shoppers Drug Mart was trading at over $45 per share in April 2010 (a high of $46.35). On April 8th 2010, SC share price fell sharply some 14% in early trading. The Ontario government published proposals to dramatically change how pharmacists were compensated on generic drugs, and a panic sell-off ensued until June. By July, the stock price had reached a low of $32.57. A lot of analysts were predicting their gloom and doom scenario for the company. Had you ignored the media hype and bought Shoppers Drug Mart at $33.00 back in July, and sold shortly thereafter at $39.00, you would have made a $6.00 profit per share, or a 18.2% return in less than 3 months.
Shoppers Drug Mart (SC-T) is currently trading at $40.52 per share, up 24.4% from its lows of $32.57 in July 2010. SC has a current dividend yield of 2.6%, a dividend payout ratio of 37.3%. Currently governments in Ontario and British Columbia are once again tightening their budgets and payouts for healthcare, which could possibly result in additional pressure on SC’s dispensing fees and ultimately profits.
Manulife Financial (MFC)
Manulife Financial (MFC) is probably Canada’s largest financial services and insurance company. Manulife was experiencing long term declines in its share price. This was mainly due to the fact that low interest rates and lower stock prices, had negatively impacted its insurance and investment obligations, which at the time were not hedged. But in early August Manulife was starting to rebound above $16 per share. On August 5th, 2010, Manulife stunned investors when it posted a $2.4-billion second-quarter loss, causing a massive sell-off (14% loss in share price) that even caused the TSE to close sharply lower. For almost three weeks Manulife dragged down the TSE and settled at a low of $11.71 by August 24th, 2010. Everyone was dumping (or shorting) Manulife and the same analysts that loved the stock a month ago hated it.
Six months later on February 17th, 2011, Manulife was trading at a high of $18.91 per share. Had you bought the stock around $12 in August 2010, and then sold for $18 per share in February 2011, you would have made $6 per share or a 50% return. While that is easier said than done, and is hindsight, MFC did hit the $17 to $18 price level a few times in early 2011. Today Manulife (MFC) trades at $12.50 per share, and has a current dividend yield of 4.2%. The company is still reeling from its high debt and payouts on investments and annuities. Manulife may indeed be a good value play, but only time will tell. The Passive Income Earner also wrote a stellar post back in December 2011, briefly mentioning Manulife in Ready to buy into the life insurance sector?
You don’t need to keep your eyes glued to the business news on a daily basis. But do keep your eyes and ears open for solid companies that get hit with bad news, otherwise you are possibly missing an investment opportunity. Bad News Investing is a great tool to help you buy stocks near their lows. When people hear bad news on a stock they panic sell, and the price moves down sharply. The key of course, is to stick with solid blue chip companies, and do your research! If a drop in share price is more to do with panic than fundamentals, you can make a nice profit on the rebound.
Disclaimer: I do not own BP, SC, or MFC. I have owned SC in the past. I am not currently considering purchasing any of the securities mentioned.
Readers, what’s your take? Do you like to go bargain hunting when companies get hit with bad news?
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