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HOW TO IDENTIFY AND PROFIT FROM UNDERVALUED AND BEATEN STOCKS

As any experienced investor can tell you, even the best companies fall out of favor from time to time. And not just companies - entire industries and sectors also can fall on hard times, making investors scramble for a quick way out. When a company, industry or sector falls out of favor, stock shares (and shareholders) can take a terrible beating. The good news is there is a way to beat even the most turbulent market. By knowing what to look for --- how to identify undervalued and beaten stocks - you can take advantage of "bad news" and buy up shares of down and out companies at a fraction of their intrinsic value. Instead of kicking them when they're down, you buy them when they're down with the knowledge that these undervalued and beaten stocks are sure to rise in value again.

The question is, how can you tell which companies are dogs and will remain dogs and which are undervalued gems ready to take off? Here are several proven techniques for identifying those undervalued and beaten stocks that are bound to rise from the ashes.

* Identify the Problem

The first thing you need to understand is why a company's stock has taken a nosedive. Is the problem temporary or long-term? In many cases, problems are the result of one-time mistakes on the part or management. While such mistakes can be costly, they don't usually result in ruining a company. Given time and patience, strong, innovative companies, with in-demand products and services will rise back to their former levels and beyond. Of course, there also are companies that may ride high for a while and then crash without having any chance to rise again. Such companies aren't worth investing in, no matter how cheap the price. Look for companies that are expected to regain their value.

* Analyze the Management's Record

Strong management generally produces strong performance. If a company continues to lose value while the industry in which it operates prospers, it's likely that management isn't up to the task. In such cases, you would be well-advised to steer clear of such losers. Perhaps new management can turn the company around, but it's not worth emptying your pocketbook until such a management change occurs.

You should analyze management's past record in terms of growth of revenue and earnings, especially return on stockholder's equity. Stocks with strong management also include those with little debt, and a return on investment high enough to generate internal growth.

* Concentrate on a Company's Past Earnings Growth Rate

Look for companies whose earnings growth rate has been at least 15% annually for the past five years and can be projected to be not much less for the next 2 to 3 years.

* Look for Industry Leaders

Companies that capture the business within their industry are generally creative and well managed. In many cases, older companies that have fallen on hard times, either due to market conditions, or other problems, can be counted on to return to their prominent position over time. Investing in such established companies when they are beaten down virtually guarantees a nice profit when these companies regain their former strength and position within their industries.

* Find a company with a current ratio of assets to liabilities of 2:1 or higher

Such a ratio indicates that the company can withstand difficulties and will most likely be able to obtain money to expand and regain its value.

* Look for a Low Debt Ratio

Try to find a company with a low debt ratio with long-term debt no more than 35% of total capital. That means the company has staying power and the ability to resist and/or overcome cyclical downturns and other problems.

* Read the Annual Report Carefully

It may not make for exciting reading but a company's annual report can give you a lot of insight into both its past and future. And be sure to look at the footnotes to discover whether or not there are significant problems, unfavorable long-term commitments, lawsuits, etc, that could potentially keep the company from regaining its past glory.

The key to identifying and then profiting from undervalued and beaten stocks is research. Don't invest in a company just because everyone else is running from it. Just because a company stock has been beaten down or is undervalued doesn't mean it's a bargain. Some companies are permanent losers. By knowing what to look for you can weed out the losers and invest in those undervalued gems that over time will fatten your portfolio and your pocketbook.

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