A company that survives bankruptcy is considered a turnaround stock.
This definition also applies to well known high flying companies that have experienced some hard times which has caused the stock price to plunge to extremely low levels. Bankruptcy is not a requirement to fit this group.
The share price of these companies have usually traded at unrealistically high prices due to being promoted and hyped by the Wall Street crowd.
A new product or service is usually responsible for the dramatic rise in the share price. Prices fall back quickly if profit expectations are not meet.
Many times the fall-back in share price will be extreme and unrealistic. If the stocks price was viewed as overpriced at it's high, then it just as likely that it could be under priced trading at the new low. I've said it before. Do your homework. This could be a great buying opportunity.
A turnaround company with well known name recognition can soar again.
The hot-shots on Wall Street already know the stock. This can be a big advantage. A little bad news can cause the herd to stampede to the exit door and drive a good company's stock right into the ground.
If the fundamentals are sound and management can correct the problem that caused the scare, then the stock stands a good chance of making a significant recovery. Many stocks go through changes of fortune many times before settling down to a trading range that's realistic.
You can find turnaround stocks in all the major financial newspapers. You can also subscribe to newsletters that follow turnaround stocks. The first step is to look for stocks that have large 52 week high and low spreads.
The next step is to do the research to find out why the stock fell so low.
Just as with bankruptcy stocks, I prefer to stick with turnaround stocks that trade on the NYSE. Many people pick turnaround stocks based on the price of the stock. I agree that this a very important factor but it's not the only one that needs to be looked at.
Look for well known companies that have high sales numbers and good management. It's very important that the company have a great product
Circle of competence
I don't think it's as difficult to figure out competence as it may appear.
If you're 5-foot-2, you don't have much future in the NBA.
What I need to get ahead is to be better than idiots.
Charlie Munger
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