Novice Investing - Making Money in Bad Companies

Date: Monday 13th 2008f October 2008 06:10:31 PM

Making Money in Bad Companies - 09/25/2006

By: Hari Wibowo

Truth to be told, you don't have to invest in good companies to make money in stocks. In fact, bad companies can return you more money if the price is right. Are you rolling your eyes in disbelief to this statement? Don't. I think you knew it pretty well from experience. Here are several examples to refresh your memory:

Merck & Co. Inc. (MRK). Who would make money investing in companies involved in 12000 product liability lawsuits? Further, its $ 4.6 Billion cholesterol drug is taken off patent this past June. That, has brought Merck down from $ 90 in 2000 to $ 26.00 last year. So far, the company has won five and lose four cases. If you generalize or even be optimist that it will lose 25% of the case, it would lost 3000 cases at a punitive damage of $ 20 Million each. That is equal to $ 60 Billion of potential liability. However, since then, it has risen to a 2 year high of $ 42.00.

General Motors Corporation (GM). Their problem is well known. Lousy cars, lousy design, inept management, far too demanding labor union. This industry might go the way airlines does. If you look at GM's balance sheet and look under the liability section, you will be gasping for breath. True, it has its financing arm that distorts the picture much, but the fact remains, this is the company that has been suffering market share losses for decades. It even has to pay $ 50,000 to its worker for not working. Yet, it has risen 60% from its 52 week low reached back in January 2006.

And most recently, Take Two Interactive (TTWO) is one bad company that has risen above the rest. I do not mean bad as morally defunct. But rather, Take Two is a company with shaky fundamental. First, it is expected to lose $ 0.96 per share (or $ 70 Million) for the fiscal year ending on October 2006. It had also received a delisting notice because of its delinquency of its regulatory fillings. The loss statement has been widely known. The company pulled its Grand Theft Auto franchise due to the R rating slapped on the game. That has left a revenue hole for the company. Meanwhile, other games had not taken off. Despite that, the company has risen 50% from its 52 week low of $ 9.06 reached just last July.

What can we learn from these companies? Why all the seemingly bad companies risen out of the dead and rise 40-50% off their lows? That is the power of value. Each company has a value on itself. Despite its problems, you cannot just write them off and throw them to the dustbin. This is what turnaround investors do. Finding bargain in the dustbin and sell them at the nearest flea market. Buying good companies at so so price is not the answer. But, buying bad companies at a good price will reward you plenty.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding General Motor Corp. (GM) or any other securities.

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