subject: Bottom Fishing...how Do You Shape Up? [print this page] Despite the attempt at a light hearted heading for this article, the skill, art and strategy of bottom fishing is a serious business and can be a very profitable one. Basically the principle is very simple. You ignore stocks which are flying and concentrate all your attention on those which for a variety of reasons have seen a collapse in the stock price.
I suspect these methods have been around almost since the beginning of stock investing but the man credited with having developed it into a formidable investing stance, was Sir John Templeton who died in 2008. Templeton was famous for buying stocks at what he called points of maximum pessimism by buying stock whose value was temporarily depressed and holding it until it at least came close to regaining its original share price. Then he would sell, making huge profits on his low buying price position. Hence the term bottom fishing.
When you consider, it's quite a reasonable and obvious strategy but with one huge proviso. How do you know if a stock is falling because it is cyclical or suffering temporary problems or because there is something seriously wrong about the company or sector in which the stock operates? If it is the latter, it may not recover for years if at all.
Obviously this is where the homework comes in. First point of reference should clearly be to examine the movement of other stocks in the same sector. Have they performed in a similar way or have they not shown the tendency to dive that your subject stock has? If there has been a general decline then obviously you will not be so much investing in a stock as in a sector. Sector depressions can take a very long time to fix and casualties can occur. The Banking sector for example has many large players trading at little more than ten to fifteen per cent of their values five years ago. Do you have the time to wait for better weather? What you should be looking for in my view is a single corporation which has underperformed but yet still has strong fundamentals.
Next, check if the management of your target stock has made any official comments about the position. For example, have they issued a Profits Warning. Even huge and sound companies can do this if temporarily their marketing goes wrong. Usually Profit Warnings though follow previously coded announcements such as The company is encountering testing trading conditions which is usually business speak for We are not doing so well as we anticipated! By the time the official Profit Warnings are made, you know things are getting serious.
The recent Profits Warning by Tesco, the first in the last twenty years is a good example. Tesco is a
huge international grocery and white goods corporation and financially sound, but it has for various reasons fallen out of favour with some of its shoppers. No doubt Tesco has contributed to this through various marketing mistakes and there has also been a recent important management change which clearly has not helped. However, the decline of Tesco, whether it proves to be a temporary one or something more permanent, owes as much to its competitors such as Morrisons and Sainsburys and the European cost cutters Aldi and Lidl getting their act together and offering real alternatives to hard pressed British householders. The UK grocery arm is what fuels the Tesco expansion plans and so when this fails to shine, those plans are also affected.
What the dedicated bottom fisher should decide is whether the stock (shares in UK terms) has fallen sufficiently to place it at the very bottom of where it is possible it could be, given the otherwise sound finances of the group. My personal view is that it may well have a little way still to go since, as it is often said, it takes a long time to turn an oil tanker and that Profits Warnings tend to come in twos or threes and so far we have only had one. But certainly Tesco is a strong company with a fine history for getting things right and so this may very well be a situation where the bottom fisher could buy now and see a profit in perhaps six or eight months time as investors recover from the shock of the profits warning.
This is simply one example but an examination of any of the top financial newspapers will reveal others practically every day. Have a look at Nokia, the mobile phone manufacturers. It's lost it's way big style. Can it recover from these depths? Is it a bottom fishing opportunity or just backing a permanent loser? These are obviously personal decisions for you to make. It is a fascinating aspect of investing which deserves much more attention than it gets. Keep your financial eyes peeled, through the often muddy waters there are still bargain catches to be had out there for the well informed bottom fisher.
