The Challenge of Buying Abysmal Stocks

 | Oct 31, 2013 | 12:00 PM EDT
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When markets are rising, no one wants to look at the under performers. It's a painful feeling to watch stocks you own decline in price when other 90% of the market is climbing higher. Such a situation creates a feeling of incompetence -- investors start questioning themselves on their ability to invest accordingly.

To be sure, if you are investing in low quality companies, then it doesn't matter if the market is climbing or rising. The issue is with the business itself and that is a different matter. But, to the extent that a company is low quality because of temporary conditions, perhaps it is a diamond in the rough. In looking at beaten down businesses, I am reminded of Warren Buffett's observation that the problem with turnarounds is that they "seldom turn."

With that caveat emptor in place, there are some names sitting at depressed or seemingly attractive valuations that perhaps deserve a second look. Consider the following names a cornucopia of potential candidates to look at and not necessarily a list of high quality candidates trading at low prices. That's the nature of fishing at the bottom of barrel: you will inevitability catch some dead fish.

ACCO Brands (ACCO) makes and sells school and office products in the U.S. and abroad. The company's brands include many recognizable names like Mead and Five Star. Distribution is a high volume, low margin business so everything has to run smoothly -- hiccups can be treacherous. Shares are trading for under $6 and analyst expect the company to earn nearly $1 in earnings per share in 2014.

You wouldn't think of the largest fertilizer company in the world as being a low- priced, low-quality stock. Potash (POT) is certainly not a low-quality business, but shares have fallen precipitously in recent months. News that one of the leading fertilizer cartels was breaking up likely will drop the market price of potash, and shares have responded accordingly by declining. But at $31 a share, you are getting the lowest-cost producer in the business and a yield of 4.5%.

Exco Resources (XCO) resources is a natural gas operation that continues to trade lower, but counts topflight investors such as Wilbur Ross, Prem Watsa and Boone Pickens as shareholders. At $5.50, shares continue to make a new 52-week low, meaning you are likely buying in at prices much lower than the investors noted above.

It's tough to buy battered businesses in an up market because you will undoubtedly look "dumb" in the short run. Let's look again at Buffett's wisdom about low-quality companies: he has never said that price is what determines whether a company is of low to high quality. Price merely determines the value you get.

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