How To Profit From 'Crisis Investing'

Jimmy Butts's picture

Friday, May 5, 2017 - 12:00am

by Jimmy Butts

When trouble strikes, you can often find excellent investing opportunities...

Just think back to the financial crisis in 2008-2009 and all the bargains that materialized -- even outside of the stock market. Granted, hindsight is always 20/20, but even the best companies in the world were trading at historically cheap discounts.

Today -- over eight years into a bull market -- it's becoming tougher and tougher to find great companies trading at discounted prices. There's a glut of stocks whose fundamentals simply don't support their sky-high valuations. And despite new record highs in the S&P 500 and Dow Jones Industrial Average, there are plenty of reasons for concern: the S&P 500's lofty P/E ratio and an outrageously high debt-to-GDP ratio, just to name a couple.

Of course I don't know when the next crisis is going to hit (but you can be sure my subscribers and I over at Top Stock Advisor will have some dry powder on hand to pick up what should be some lucrative investing opportunities). But that doesn't mean we can't currently find deals in what I like to call "crisis investing."


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You see, companies often experience their own crises -- scandals or other public relations disasters that prompt investors to dump shares, sending prices plummeting. Sometimes shares stay down for good reason, but other times shares only stay depressed because investors simply neglect the companies after leaving them for dead.

But if you can find a company that's had its own internal, temporary crisis that's caused its stock to tumble -- providing you the opportunity to swoop in and pick up shares at bargain prices -- then you could make a fortune.

The Time To Buy Is When There's Blood In The Streets
Sometimes that window of opportunity is slim. Take Wal-Mart (NYSE: WMT), for example. In 2012 shares of the retail behemoth suffered a small blow when news came out that it was involved in a massive bribery scandal. Shares tumbled roughly 9% in only three days. Investors quickly realized that they overreacted and piled back in... but those that bought when others were fearful were rewarded for their contrarian view:

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We've also witnessed how this sort of "crisis investing" can pay dividends with a company like American Express (NYSE: AXP). You may recall that American Express has actually survived a number of scandals throughout its history. The most prominent is probably the Salad Oil Swindle of 1963. (If you're not familiar, look it up. I promise it's a real thing.)

After the stock price had collapsed from the scandal, Warren Buffett stepped in and took a 5% stake in the company, on which he made a cool $20 million profit. (Then later regretted selling and bought more shares.)

When I first recommended shares of American Express in my premium newsletter, Top Stock Advisor, the company wasn't going through a scandal per se, but many investors considered it a crisis. American Express had lost its co-branding partnership with Costco (Nasdaq: COST). Investors fled the scene, essentially leaving American Express for dead. The stock tumbled 45%.

We stepped in and picked up shares for only about seven times its cash earnings, a valuation the stock hadn't seen since the 2008-2009 financial meltdown. Since September, when we added this exceptional business with a great brand at a discounted price (due to the Costco crisis) we've been rewarded with a nice 23% return, more than double what the S&P has offered over that same period.

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There are numerous stories like Wal-Mart and American Express, where share prices were negatively affected by their own internal crises. However, not all have made the strong recoveries and proven to be lucrative investments like the ones above. The key to finding winners in this space is really pretty simple. It's the same concept that we employ at Top Stock Advisor when looking for stocks to add: buy great companies at great prices and hold on to them for the long haul.

Just think back to the 1987 savings and loan crisis, when the Dow dropped 22% in a single day... think you could have picked up some good deals then? Or how about the bear market of 1973-1974, when the market lost 45% in roughly 22 months -- allowing Warren Buffett to purchase a stake in the Washington Post Company (NYSE: WPO), an investment that earned 100-times what he paid.

It's for this reason that Buffett says "Be greedy when others are fearful..." In fact, that's exactly what my Top Stock Advisor subscribers and I did with our latest pick. It's a company that's suffered its own setback that sent shares plummeting. But like many of the crises we've talked about, it is only temporary, and more important, it's a fixable problem.

Keep this in mind when looking for "crisis" investments. By being "greedy" when others are "fearful," you'll be able to take advantage of these situations and be one step ahead of the crowd. In the meantime, if you'd like to get access to the name of our latest "crisis" investment in Top Stock Advisor, follow this link.

Jimmy Butts does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.