| Value corporations |
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Dexter and his friends are walking down the street. A group ahead sees something lying in the street. It's a genuine frisbee brand flying disc. Dexter watches as they take a quick look and walk past. When Dexter comes to it, he sees it's got some dirt on it but otherwise looks to be in good shape. Yet, he walks past as well. Why did Dexter walk by the frisbee?
This is the story of value stocks, companies that are being ignored by investors. Dexter probably walked by the frisbee because he saw his buddies walk by it as well. No one wanted to be the person to pick it up. Similarly, corporations sometimes figuratively wind up being thrown in the gutter.
How, exactly does a corporation chase investors away? One way is to be associated with a stagnating or declining market. Even if the corporation is doing good things, if the market the corporation is operating in is not growing, over time investors may give up on it. This is the way many people feel about Microsoft, which is still focused on personal computers as computing is going mobile.
Another way is to have earnings "misses" quarter after quarter. The drop in the share price that can occur after an earnings miss can be demoralizing. Doing it again and again can cause investors to simply lose faith in the management of the corporation and give up by selling their shares. Below we see a great example in the huge networking equipment supplier Cisco Systems: Quarter after quarter investors bought Cisco's stock, bidding it up before earnings (green arrows) in anticipation that it would get on track. Yet, time and again, Cisco disappointed investors (black arrows) and provided little indication it was getting a handle on its problems. The stock then plunged. Yet, being such as legendary corporation, Cisco enjoyed interest from new investors who figured they'd take their shot. Eventually, they gave up, too. The stock plummeted all the way down to about $16 and stayed there for four months (red oval). It was arguably a great value at that price. With the passing of the next few quarters, we'll see if investors made a good value investment.
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