Bad News Investing ~ Profit from Crisis

Stock Traders

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.

Gulf Oil Spill

Photo courtesy of inhabitat.com

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

Courtesy of Manulife Financial

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?

Conclusion

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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27 Responses to “Bad News Investing ~ Profit from Crisis”

  1. Richard

    Jun 05. 2011

    BP re-instated their dividend as of Feb, 2011

    BP PLC (BP-N44.63-0.37-0.82%) is selling off more assets and resuming quarterly distributions as it readies itself for a post-spill future increasingly oriented toward fast-rising Asian demand and new production in places like Canada.

    Reply to this comment
  2. The Dividend Ninja

    Jun 05. 2011

    Richard, Thanx for posting :)

    Reply to this comment
  3. BP’s P/E is absolutely sickening.

    This stock is destined to return to $60+ range, the question is when. Even if it took 3 years you are still talking 30+% return if it touch touches $60 a share (considering dividends).

    Good article.

    Reply to this comment
    • The Dividend Ninja

      Feb 27. 2012

      Drew I think the dividend yield over 4% is quite nice, as is the payout ratio. The debt for BP is quite surprisingly low as well. ;)

      I’m not surprised the PE Ratio for BP is out of the norm, considering the sale of assets and cash it paid out in Gulf of Mexico clean up costs and settlements etc. But your right, there must be a reason why its that low…

      Cheers

      Reply to this comment
  4. Money Infant

    Feb 26. 2012

    It does takes some nerves to jump into a stock in the midst of a crisis, but as you pointed out the rewards can be very juicy. Because people as a whole tend to over react to news events these stocks often get sold off well beyond what is justified by the fundamentals. If you have the courage and calm to buy during the crisis and wait for the recovery you can do quite well. Good article and good idea.

    Reply to this comment
    • The Dividend Ninja

      Feb 27. 2012

      Money Infant thanx for posting! It really does take nerves, becuase everyone else, inlcuding analysts and the media think the world is ending ;) Just like early in 2009…

      I vividly remember August 2010 I had cash on the sidelines and could have easily bought MFC for under $12. But I bought into the panic. Even so it was a nice rebound… My recent value play was Cisco Systems (I’ll cover that in a future post).

      But it doesn’t mean every stock that goes down in value is a bargain. Right now I think RIM is an example of a value trap – time will tell.

      Cheers!

      Reply to this comment
  5. Michael

    Feb 27. 2012

    Still holding my BP PLC shares, picked up @ $28.50 USD, and as you’ve noted, up handsomely, and a nice dividend now too. As well, a couple of special/one time dividends declared as well.

    Reply to this comment
  6. Poor Student

    Feb 27. 2012

    In hindsight I would have loved the profits of buying BP. Alas I had no money and probably not enough guts. Also, I think that my conscience would have kept me from it anyway.

    That spill was so disastrous, lasted so long and they looked so helpless and foolish it was sickening. They have come around and done a lot to remedy the situation but at the time it looked like they were not doing all they could to stop it. I remember the news footage of oil bursting out and nobody being around to stop it.

    I find bad news investing easier when it is the market as a whole that people are down on. Be greedy when others are scared, right?

    I do try to look for companies that are being hit, but available money and fear, both things that are needed usually keep me from profiting from bad news.

    I will look into Shopper’s Drug Mart again if they pass further regualtions against them.

    Reply to this comment
    • The Dividend Ninja

      Feb 27. 2012

      Poor Student yes you are right it takes guts of steel to buy a stock being pummelled! ;) I didn’t buy into BP either, although I had the cash to do so, for what I considered etchical and moral reasons. As an investor I am willing to make that choice.

      Cheers
      The Dividend Ninja

      Reply to this comment
  7. I bought BP after their 3rd or 4th attempt failed in shutting down the leaking well. It was a calculated risky move on my part, but these events are rare so I took the opportunity.

    You see I stood on the sidelines a few years ago when:
    – Merck got into trouble with Vioxx
    – Philip Morris was being sued by the state of Florida and others for billions for cause health problems
    – McDonald’s was doing poorly, and the documentary Super Size Me didn’t help either. The public was starting to look down on fast food joints

    In each case years later, the stock prices soared. So I learned my lesson, when an opportunity presents itself don’t stay on the sidelines.

    Reply to this comment
  8. The Dividend Ninja

    Feb 27. 2012

    Kanwal That’s an awesome comment!

    I stood on the sidelines with BP (as mentioned for ethical reasons).

    I stood on the sidelins in 2010 when Manulife was pumelled, and had the cash to buy in.

    When Shoppers Drug Mart was pumelled in 2010 I bought in at $34 per share like a greedy hawk, I sold a few months later over $39.

    When Cisco Systems was pummelled with poor earnings and John Chalmers poor speeches, I bought in at $19.50. My regret was not buying more when it went down to $13 per share last August.

    Next time I’m getting greedy :)

    Cheers
    The Dividend Ninja

    Reply to this comment
  9. I think Warren Buffet said this once: “Be greedy when others are fearful, and be fearful when others are greedy.”

    Ahhh yes I forgot about Manulife….I was on the sidelines for that too. :(

    Reply to this comment
  10. I love investing in Apple. In the last few years, anytime there was bad news or they’d miss expectations I would buy. They usually recovered within a couple days if not hours after the news. I made a few bucks with options.

    Reply to this comment
    • The Dividend Ninja

      Feb 28. 2012

      Paul Yah that’s another way to do it! Just keep holding a company you really like, and add to your position on the dips. :) If and when Apple should happen to pay a dividend, you will be sitting real pretty!

      Cheers

      Reply to this comment
  11. youngdividend

    Feb 28. 2012

    Great article, very good analysis. Glad I found a useful site like this.

    Reply to this comment
  12. My Own Advisor

    Feb 28. 2012

    Great post, an oldie but a goody!!!

    I was thinking along the same lines as Kanwal. I’m going to be buying more MFC soon. I figure at this price, it’s worth the risk.

    Buy when there’s blood in the streets…

    I recall buying Enbridge after the stock market tanked a few years ago. It was one of my best investing moves ever.
    Now I own at least twice as many shares thanks to their most recent 2-for-1 split.

    It’s never easy to buy stocks when everyone around you is selling, but I’m learning it’s one of the best ways to be successful. It makes your stomach churn though! :)

    Mark

    Reply to this comment
    • The Dividend Ninja

      Feb 28. 2012

      Mark Always glad to have you drop by the Ninja!

      Yah it really takes nerves of steel and a strong stomach. I whimped out on buying more CSCO (Cisco Systems) shares last August when it was down to $13 to $14 per share – and look where it is now over $20 LOL.

      Manulife is at a good price point IMO at these levels, and I think its a better buy than Sunlife (with its high dividend). Of course the entire Canadian life insurance sector has massive debt leveles right now – that’s the card holding investors back right now – the fear factor! IMO I think getting into MFC at these prices is a good long-term value play.

      Cheers ;)

      Reply to this comment
  13. ThePaperboy

    Feb 29. 2012

    I’m totally for this kind of investing. The only problem I have is the fear that I’m jumping onto a sinking ship. I find it a lot easier to pull the trigger on the stock if it has a nice dividend attached to it. That way if the price is beaten down for longer than expected, I can sit on my shares without being too worried.

    – the Paperboy

    Reply to this comment
  14. My brother and my ex boyfriend picked up some BP shares back then and kept telling me to do so as well, but laziness got the best of me and I regret that decision.

    Now, I wonder if RIM might be a good buy right now….

    Reply to this comment
    • The Dividend Ninja

      Mar 09. 2012

      Hi Marissa, thanx for posting! There are always opportunities ;) I simply refused to buy BP after the spill, for “moral” and “ethical” reasons. There will be other companies that run into bad news and see declines in their share prices. There is always a stock on sale, if you don’t follow the herd.

      Now RIM I would definitely NOT buy! For one thing it doesn’t pay a dividend. So if the share price declines you won’t make any income. Many of us only buy stocks that pay dividends. Secondly their profit margins are declining, as are their sales (though I have a BlackBerry and like it). In addition the new CEO has not indicated he is making any significant changes – i.e. all the problems plaguing RIM still continue. On top of that the ex CEO’s sit on the board! Rather than pay a dividend, RIM engages in share buy-backs that profit board members. There is no change to fundamentals here and no reason to buy in IMO. I do beleive RIM will become another Nokia, or even possibly another Nortel. The make it or break it point for RIM was the playbook, which I think is a better product than the iPad, but it didn’t work for them. It was poorly launched without functionality or sufficient apps:

      http://www.dividendninja.com/will-the-playbook-save-rim

      Cheers!

      Reply to this comment
  15. youngdividend

    Aug 04. 2012

    I read this article before and wanted to come back to it to read it again. I am now interested in Manulife, but am confused about the payout ratio. A magazine I read earlier this week said it had a payout ratio of 46 percent but when I do my calcuations from google finanace, yahoo finance, the payout ratio is over 100%. Do u know the accurate payout ratio. I just put a limit buy on them $10.50

    Reply to this comment
  16. Sridhar

    Jan 05. 2013

    Hi Dividend Ninja,
    Thanks for sharing real examples and how some stocks turned out to be success stories, while others are either neutral or negative. Good work – its not easy to pick such cases with precise data points.

    I agree that crisis presents and opportunity, provided you have the guts and also some savings to make purchases. This works well for a new investor.
    Now my questions is a case where I hold BP shares before the crisis at $62 and suddenly get caught due to the crisis news and see it going all the way below $30. In this situation what should i do ?
    Do I sell all my holdings and buy it back later at cheaper prices? (or)
    Should I buy or add a few more shares on dips ? (so that my dividend and future holding gains are not compromised) (or)
    Should I sell a portion of my holdings and buy back at cheaper prices (either gradually on dips or in bulk?
    Please share your advise or points of view (though I understand that is not perfect or right answers to these questions)

    Reply to this comment
  17. AJ

    Jun 04. 2013

    Check out
    Constellation Brands
    Lulu Lemon
    Budweiser
    Blackberry

    for more recent examples

    Reply to this comment

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