When the stock market is depressed, there are always some fantastic investment opportunities. But how do you find them?
Most of the great investors will tell you that market troughs are the best times to buy shares.
In "One Up On Wall Street" Peter Lynch -- sounding a bit like Kipling -- says: "If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says 'sell' you'll find opportunities that you wouldn't have thought you'd ever see again." Hear, hear.
Lynch talks about the elusive ten-baggers he's been shrewd enough to be invested in; i.e. shares where you make 10 times your money. The problem with this is that private investors have been trying to replicate his success ever since -- and few people are as talented as Peter Lynch. Perhaps the best advice is to stop looking for ten-baggers, if you're serious about investing.
Keep your eyes open
Lynch reckons you're most likely to find prospects close to home -- at the shops or where you work for example -- and that the average person comes across a likely prospect two or three times a year. It's all a matter of being alert to the opportunities we see around us. Anyone spotting the UK's penchant for eating home-delivered pizza and the potential for Domino's Pizza (LSE: DOM) to excel eight or nine years ago, for example, would have a ten-bagger on their hands. And that opportunity was, arguably, more likely to have been spotted by the delivery boy than the city analyst.
But Lynch also talks about turnarounds and there'll certainly be a few ten-bagging turnarounds, eventually, from the current turmoil. A recovery to anything like previous levels could see the big banks bounce back, but the vast number of additional shares they've issued means they're unlikely to be ten-baggers. Often, potential turnarounds have big debts or other problems, but low price-to-sales ratios (PSRs) which makes them high risk, but high potential reward situations. The good thing is that one big winner can wipe out quite a number of total losers.
Meanwhile, some of the "cyclical" companies Lynch makes reference to are at, or near to, all-time lows. A cyclical is a company whose sales and profits rise and fall in a fairly regular pattern depending on the economy. Car-makers, airlines, big chemical companies and tyre companies are examples. But these aren't as likely to be the ten-baggers.
Don't be a thrill-seeker
The big winners often sought by private investors are small companies in "exciting" industries like technology, oil exploration, mining and so on -- companies whose earnings, it is thought, will go through the roof in a few years' time. Oil explorer Soco International (LSE: SIA), one of The Fool's most talked about and best-researched companies, has enjoyed a meteoric rise in recent years, as the chart shows.
Sadly, though, most don't make it. For every exciting company that has achieved the mythical ten-bagger status, there are far more that have gone the other way. In fact, Lynch argues that you're far more likely to find a ten-bagger with a relatively simple businesses model that any of us could understand.
Patience is a virtue
Perhaps the most important virtue of all for those seeking multiple returns in a number of companies rather than a single punt is patience. It's tempting to cash-in when you've made a quick turn, but anyone holding the likes of GlaxoSmithKline (LSE: GSK) and Tesco (LSE: TSCO) over a long enough period, will reaffirm the value of being a patient investor.
Overall, it's best to learn from the masters like Lynch and Warren Buffett. You're far more likely to find a ten-bagger in a solid company with strong fundamentals, a solid balance sheet and a high quality of earnings, with the potential to grow the top line over time -- than with the latest over-hyped exciting speculation. And if you think like Peter Lynch, there's never been a better time to look for those companies.
If you think you've spotted any potential ten-baggers, let us know using the comment feature at the end of this article.
