These Kinds of Stocks Look Like Nightmares, but Can Bring Happy Endings

We all dream of the big score, when a stock you own doubles, triples or surges even higher. Exceptional growth stocks sometimes do that if you're willing to hold for many years, or even decades. Keeping even wonderful stocks of the finest companies -- when they've already gained huge amounts -- is very tough. Few shares go up in straight lines. They tease us with large run-ups followed by sharp and substantial pull-backs. Amazon dropped from an early 2008 split-adjusted $97.40 to just $34.70 during that year's crash. That represented a 62.7% decline. From its September 2018 peak of about $2,003 to its December 2018 nadir, AMZN plunged by 34.7% in less than three months. The 2007 peak of the search giant now known as Alphabet at almost $400 (split-adjusted) came just before a sickening slide to under $124, during 2008. Ouch. How many people simply ignored those kind of movements and sat tight? Most of the people that make fortunes from those kind of shares simply forget they own them and wake up, like Rumpelstiltskin, to find they are quite rich some years later. There's another way to try for huge gains. It requires incredible will power and traders' acceptance that their investments could potentially go to zero. Why mess with distressed merchandise like that? When stocks that trade as left for dead survive, they can generate enormous returns. One good pick can more than make up for the inevitable few that do go bankrupt. You can only lose 100% of what you put up, but there's no upper limit on potential gains. Pier One Imports fell to south of 20 cents in 2009 before ultimately rebounding to north of $25. Plunking down $1,000 near that low... grew to $125,000 at the top. PIR is struggling again, but it's now more than 10-years since its first stock market funeral. The company is still alive. These companies don't have to prosper to win big. They typically just need to remain alive long enough to see a short-covering rally or two. More recently, Diebold Nixdorf , one of my picks, ran into some serious difficulties. An ill-timed acquisition at a bad price, caused DBD to pay out over $400 million in cash to the former shareholders of the other company. That gutted the balance sheet. It also sent the formerly profitable firm into losing money. Dividends were reduced, then abandoned. The shares dropped from near $32 in March of 2017 to just $2.41 by December of 2018. A summary of the very real bad news is shown below. Value Line did note DBD's huge three-to-five year potential, while cautioning all but the most speculative traders from touching the shares. DBD, one of the largest ATM makers in the world, was trading like a goner. Only a fool would have bought in the face of all those negative factors, right? Fast forward just a few months, though, and signs of a turnaround were becoming evident. The stock rallied to the about $13.49 by April 25, a cool 459% move off the December low. The general market correction in May and June, then sent DBD back down to $8.14. That 39.6% short-term pullback probably shook out anybody who didn't still completely believe in the turnaound. But surprise quarterly adjusted earnings per share profit in the June quarter sent the stock soaring again on July 25 and beyond. As of midday on July 26, DBD was hovering around $14.30. Buyers on the June 3 low were up almost 76% in six weeks. Anyone who bought on Christmas eve was sitting on incredible 493% gains. I'm not recommending DBD anymore. It just serves as a prime example of how a horrible looking, potential bankruptcy waiting to happen, can turn into a fabulous stock. There have been hundreds of stocks like this over the years that appeared terminal, but weren't. Legendary money manager Sir John Templeton of the Franklin Templeton Fund Group made some of his first big scores by accumulating shares in every New York Stock Exchange-listed stock under $2 during World War Two. Lessons to be learned: Markets tend to overreact. Absolutely low prices don't necessarily reflect true values. Left for dead stocks often generate enormous gains when they don't go under. Major percentage moves can take place in very short periods. Losses are capped at 100%, potential gains have no ceilings. It pays to diversify, some stocks can and will go to zero. Speculating on horror-show issues can be nerve-wracking. These types of plays should be limited to money you can afford to lose. Think of these high-risk, high-potential situations as perpetual call options that never expire. (I hold no current positions in DBD, AMZN or GOOG shares or options. I continue to hold Francesca's FRAN, my very worst pick of 2018, hoping for a miracle turnaround like DBD's. The data on FRAN today look better to me than prospects for DBD appeared last December.) Apple and Amazon are holdings in Jim Cramer's Action Alerts PLUS member club.

These Kinds of Stocks Look Like Nightmares, but Can Bring Happy Endings

Follow these rules and you won't have to put up with Rumpelstiltskin-like waiting to turn big profits from companies that look ready to go belly up.

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