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Author: Scott Pearson Article source: http://www.askfinancing.com/. Used with author's permission.
Picking a beaten-down stock requires a different kind of selection process. Normally, most companies beaten down this far have no earnings to speak of. Of course, if the company continues to earn money, one can apply normal valuation techniques. By that measure, many of these stocks appear outrageously undervalued: an indication of great buys. But this may also be a red flag that things are "too good to be true".
Another criteria we look at focuses on the breakup value of the company and/or the ability of the company to keep operating in troubled times. For example, debt ratios are important because we want to be sure the company will not be swallowed up in its debt payments. Book Value tells us the value of each share based upon the accountants valuations of assets and liabilities. Sometimes, we also look at cash-on-hand to determine if the company is able to continue as a going concern.
A glance at the high and low price that the shares have sold for in the past may indicate no more than how crazy the market was only a few short years ago. Still, if investors were willing to pay $200 per share for a stock two years ago, it is difficult to believe that it's worth less than a dollar today. Maybe the reality is somewhere in between.
Openwave Systems (OPWV $1.12, High $208; Buy Aggressively), is the top supplier of software that mobile service providers use to offer text and instant messaging to customers. It also provides mobile Web browsing software. The company, which resulted from the merger of Phone.com and Software.com, develops products providing wireless data transfer and messaging, mobile e-mail, and directory services. A recent acquisition of SignalSoft adds a new product line, software that assists cellular users to locate destinations or other users. The company has a loyal subscriber base, and outstanding growth prospects. Openwave, however, is typical of today's bargains. Formerly selling as high as $208 per share (no, that's not a misprint), shares today cost only a little over a dollar. With a book value more than 4 times that amount, virtually no debt, and cash on hand in excess of the stock price per share, there can be no doubt that the shares are now selling at outrageously low prices. We believe these shares represent an outstanding high-risk buy at current prices. To send comments or to learn more about Scott Pearson's Investment Advisor Services, visit http://www.valueview.net
Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.
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