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Common stocks in this category practically always have an unsatisfactory trend of earnings. If the profits had been increasing steadily, it is obvious that the shares would not sell at so low a price.
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The objection to buying these issues lies in the probability, or at least the possibility, that earnings will decline or losses continue and that the resources will be dissipated and the intrinsic value ultimately become less than the price paid. It may not be denied that this does actually happen in individual cases.
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On the other hand, there is a much wider range of potential developments which may result in establishing a higher market price. These include the following:
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1. The creation of an earning power commensurate with the company's assets. This may result from :
a) General improvement in the industry.
b) Favorable change in the company's operating policies, with or without a change in management. These changes include more efficient methods, new products, abandonment of umprofitable lines, etc.
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2. A sale or merger, because some other concern is able to utilize the resources to better advantage and hence can pay at least liquidating value for assets.
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3. Complete or partial liquidation.
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