Over the long-term, profit growth drives stock prices higher. Growth is what creates value. Pay too much for growth and your investments may not deliver any value to your portfolio. On the other hand, when growth can be bought cheaply, the potential upside could be huge.
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Crushed Stock Prices
Stock prices have come under pressure lately. For some businesses, their share price has been crushed as a result of a bad quarter, reduced outlook, or merely by falling out of favor with analysts. Yet many of the companies are still profitable. That combination could spell opportunity for investors. THQ Inc. (Nasdaq:THQI) is a small cap video game company. Shares trade for $1.80, down from nearly $7. Analysts are expecting 2012 EPS of negative 19 cents. The company has no net debt and trades at 75% of book value.
Central European Dist Corp (Nasdaq:CEDC) shares have sunk to under $8 from nearly $30 a year. Back in 2008, shares were trading for over $70. CEDC is the world's largest producer of vodka and a leading distributor and importer of other spirits. A weaker outlook has caused management to reduce EPS from over $1 in fiscal 2011 to a range of 80 cents to $1.00. At $7.80 a share, CEDC still trades at around 7 times forward earnings.
Real Estate Anyone?
Equity One (NYSE:EQY) is a real estate investment trust (REIT) company, based in Florida with a principal focus on commercial shopping centers. Shares are trading for $17, near a 52 week low, and yield over 5%. The company's chairman has been buying a lot of shares for himself in the open market at these prices.
Ashford Hospitality Trust (NYSE:AHT) is another REIT with a concentration on hotels. Shares currently trade for $7.90 and yield 5.2%. Analyst estimate 2011 EPS of $1.97, or about 4 times earnings. Insiders have also been net buyers of shares.
The Bottom Line: No One Said It Was Easy
Buying shares in a business surrounded by a negative outlook is something very few investors do. No one said it was every easy to do so, but that likely explains why share prices can often be found at bargain levels. (For additional reading, also take a look at Survival Tips For A Stormy Market.)
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