As someone who looks over company reports, news and stock charts every day, I like to find stocks that are advancing and making new highs. Yet sometimes investors can make better returns if they see a good company having temporary difficulties and take advantage of the situation.
If a problem can be fixed or some business condition is short-term, then you can pick up a bargain like when your favourite product at the supermarket is heavily discounted for clearance. There really is no difference in principle.
Cochlear Limited (ASX: COH), the maker of the Cochlear bionic ear hearing device, hit a $82.28 high in mid-January 2013, yet since then has slid down to $57.65. The market was expecting new product launches, yet the timing of the launches slowed revenue. Revenue started to recover later in the first half of FY2014, however interim results were affected and earnings were way down.
For the second half, the company is forecasting net profit to be about $70 million – $80 million and in line with first half FY2013. In March, the US Food and Drug Administration (FDA) gave its approval for its Nucleus Hybrid Implant System for commercialisation.
The market didn't react very strongly to that announcement as seen in share price movement, but with revenue and earnings coming back in line as well as the new US approval, the stock should see improvement. That's why I am looking for a turnaround in earnings and share price.
AMP Limited (ASX: AMP), the wealth management and financial services provider, saw a drop in underlying net profit in its annual results due to the integration of its AXA Asia Pacific life insurance company and costs associated with business efficiencies.
Once fully integrated, the company is forecasting about $150 million in post-tax annual synergies. It looks to areas like the growing superannuation and self-managed super funds market to grow the business further. In addition, it can increase its AMP bank business with the growth in residential home loans.
Its PE is 20 and the dividend yield is 4.8%.
Foolish takeaway
Long-term investors look forward to market sell-offs and corrections to boost returns by buying at better prices. Knowing the companies beforehand helps you recognise the value and significance of the lower share prices and doesn't scare you away.
