Learning to Hit The Curve

05/31/2012 6:45 am EST

Focus: MARKETS

Marc Gerstein

Editor, Forbes Low-Priced Stock Report

This is no time to get complacent...this market offers great opportunities, but they only work out for investors who stay on top of the trends and can ride the volatility, writes Marc Gerstein of Forbes Low-Priced Stock Report.

While at Value Line, I covered a retail chain called Burlington Coat Factoryfor a while. One particular conference call still stands out in my mind.

I can’t recall whether it took place in some time in the early- or mid-1990s, but I’ll never forget the answer then-CEO Monroe Milstein delivered as he jumped in to rescue his financial executives from the harsh analyst cross-examination they were experiencing in response to a disappointing sales report.

Milstein said: “I’ve been in this business for a long time. There are good months and there are bad months. This was a bad month.” That was all. The analysts were speechless.

I don’t recall what happened to the stock in the subsequent days and weeks, nor do I know what happened to the analysts, but Milstein turned out pretty well. In 2006, Burlington was sold to Bain Capital (Mitt Romney’s firm) for a price well above the stock-market valuation, leaving Milstein to ride off into the sunset as a freshly minted billionaire.

So I guess at the end of the day, he was a big winner. I wish more CEOs would have the gumption to serve up unvarnished common sense the way Milstein did, although I understand it’s getting harder and harder.

Fast forward to the May 16 conference call held by one of the companies featured this month. It had a bad quarter, not horrific by any means, but bad. And management tried to brace the market for more potential tough times, which is understandable since global economies remain wobbly and there is cost inflation for users of plastics.

The CEO there, however, did an arguably bolder thing than what Milstein did. In response to questions about how the company would increase shareholder value (which included an out-and-out request that the company allocate its substantial cash holdings to a dividend and hints that a big share buyback might be appreciated), he had the temerity to brush them off, explaining that the cash was needed to invest in growth (capacity is a major concern).

The stock plummeted nearly 50% in the days ahead—and this had nothing to do with the fact that the firm is Chinese!

I don’t know how this will work out, but episodes like this do make one wonder, especially given that this week’s lead headline in The Economist is “The Endangered Public Company.” Burlington bailed out. Will the current company eventually do likewise? One has to wonder if the events of the past few days are prompting somebody there to start thinking.

We, as investors in low-priced stocks, cannot change the world. But if there’s any group of market participants that ought to be able to step back from the beat-the-guidance madness and consider what these businesses actually are and what they’re worth, I think we’re it.

It’s great to jump aboard hot stocks or get in on great-sounding growth stories (we’ve done that often and we do more of it this month with some other stocks). But the market doesn’t always serve up the “fat pitches” Morningstar seeks.

One can sit and wait for one indefinitely, as Morningstar suggests. Or we can do what major league ballplayers (the guys with the gazillion-dollar contracts) do: learn to hit the curve ball.

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