JCP traded as high as 87 in 2008 and now trades near 5 dollars.
There is always a reason why a stock will get down to these kind of beaten down level. Something is terribly wrong in the business. For 5 years it is in downtrend.
When you look at the stocks down 50% plus from 52 week high they will invariably have a catalyst for that kind of drop.
Some of the common reason for a big drop are:
- excessive bullishness driving stock to unsustainable level resulting in subsequent drop
- loss of earnings power
- high cost
- high debt
- management changes
- outdated technology
- faulty business model
- industry structure change
- fashion or craze product loses appeal
- overall economic slowdown
- replacement product at lower price
- mergers gone wrong
- product recalls
- natural disaster
- regulatory action
Many of the stocks down 50% from high do not survive the problem if it is not a fixable problem. If the problem is easily fixable then the stock will bounce back very quickly. If it is not fixable you will have death by thousand cuts.
When going through the beaten down list you need to find out why stock is in the list and what kind of catalyst can lead to turnaround.
The best candidates in beaten down scan are where the problem is easy to fix.
WBMD is a recent example of this:
In 2002 WBMD got in to trouble when its earnings plunged after pharma companies cut back on advertising. Management troubles further created problems with new CEO unable to turnaround company quickly. It put itself up for sale to go private, but there were no good offers.
Activist investors got in to picture. Bought stake in the company. Forced management out. Pushed for share buyback and aggressive cost cuts. As a result company had profit turnaround even though revenue growth has been not that good. This is an example of low hanging fruit kind turnaround. But now it will find tougher to keep going higher as turnaround is now priced in.
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