Cheap Stocks Are Not the Same as Value Stock Picks

Value stock market investors are piling into low-priced stocks at a record rate, particularly so-called “penny stocks.” While there is no strict definition of the term, it is often used to refer to any stock trading below $5 per share, although many penny stocks actually do trade for just a few cents per share. The majority of these penny stocks trade on the “OTC Markets” rather than on major exchanges like the New York Stock Exchange or NASDAQ. Stocks traded on the OTC Markets are subject to less stringent listing requirements than stocks traded on the major exchanges. 

Some investors justify purchasing low-priced stocks by saying, “You can’t lose much on a low-priced stock.” While that may be technically true on a dollar per share basis, you can lose just as much of your total investment on a stock trading at 1 as you can on a stock trading at 50–in either case you can lose up to 100% of your investment.

It should be noted that The Turnaround Letter rarely recommends stocks listed on the OTC Bulletin Board or Pink Sheets because their liquidity is insufficient; however, there are are exceptions. For example, The Turnaround Letter recently offered up this promising large-cap whose shares trades OTC--at 19.9x earnings and only 7.7x cash flow. In this case, the value stock pick's future looks much brighter than its past troubles imply: The company has many valuable assets, and its solid balance sheet provides financial flexibility.

The above example illustrates that despite our valid and necessary warnings, it is certainly possible for distressed investors to make substantial profits on low-priced stocks--particularly if the stock price is low because the company is in the process of turning around. Turnaround companies usually have substantial operating histories and significant assets, but their stock prices are low because recent results have disappointed investors. The key here is a prudent distressed investing strategy focused on deeply-diversified long-term holdings and value stock opportunities with a primary focus on well-known companies with a solid core business, established track record and good brand name or franchise around which to build.

More Turnaround Tips

Identify & Profit from Distressed Investing

Free Report: Distressed Investing

Turnaround Investing Blog

Turnaround Investing Blog

Return of Volatility? No, Return of "Normal"

Sizeable market moves can increase the temptation to sell on downdrafts and buy on upswings; however, we strongly advise against attempting to do that. The chances of getting out at the right time and then back in again before the market rebounds are extremely slim. Read More.

Harnessing Activists to Help Find Turnaround Stocks

Activist investors often produce attractive returns for their clients; and you can still use their influence to help your position as a turnaround investor in two ways: Buy a position in a stock with the expectation that an activist will soon follow or buy after an activist takes a stake.


Value Investing


While one of the many dozens of activist funds might find their way to selecting your particular stock, this approach is likely to be frustrating and unrewarding. A better approach is to buy after the activist makes their move. Once an activist takes a stake in a company, how do you evaluate whether it is worthwhile to follow on? Admittedly, this is a bit of an art... Learn how you can harness the power of activist investors to find market-beating turnaround stocks.

Turnaround Letter Stock Pick Named Top Performer of 2017


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What Last Year's Top Stock Pickers Are Buying in 2018


This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.


George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."