O'Reilly logo

Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 20

Stock Research Checklist—Turnaround

You can make a great deal of money if you are able to get into successful turnaround situations and hold the stock until the business returns to a normal operating environment. When a company deteriorates from a successful company to a difficult situation, everyone wants to get out. No one will be there to buy the stocks and the price declines will be enormous. Sometimes, prices can fall more than 90 percent from a previous peak. If the company survives from that downturn, whoever got in at the bargain price stands to earn a great deal of money.

Has the Company Taken the Following Steps to Turn the Business Around?

Consider a company that has stock trading at around $10 per share when it is operating in a normal environment. When the economy falls into a recession and the company falls into a difficult situation, it loses 90 percent of the stock price and is trading at around $1 per share. After careful analysis, you feel that the company will survive the downturn and you get into the position at $1 per share. The company slowly starts to recover. The rate of recovery tells you that it will take another three years before the company is able to generate the same kind of revenue it did pre-recession. You can reasonably assume that the market will give the same kind of valuation as a normal revenue generating capacity, so that a $10 per share price reached in three years is a total return of 900 percent, which is a 115.44 percent compounded ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required