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Hidden Gems Among the Fallen - A Contrarian Investment Strategies


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A study from 2000 to 2014 concluded that there were about 260 companies that were among the select few to be members of the elite S&P 500 ranks that were for various reasons delisted to the lower ranks.  The reason for their fallen ranking varied.  But, even after this disappointing event, some survive to live another day and become more prosperous.  This is just another strategy that an value investor may have an edge. So why is this important to you, the value investor?

The reasons range from M&A activity, taken over by a private equity firm, the owner takes it over, filing for bankruptcy protection, etc. The majority of the reasons fall into the M&A activity group.  This is another place to look for undervalued firm, another place to go fishing for value. As a member of the S&P 500 club means you must meet the requirements of a lot of regulatory rules and must file a lot of paperwork and report specific information under the SEC and other government bodies.

Another study covering about 1,098 delisted companies from the NASDAQ from 1999 to 2002 who found they ending up on the OTC revealed some interesting facts. Some of which included: about a 66% volume decline, about a 3 times increase in the price spread from 12% to almost 34%, declined about 20% in their value once delisted among other not so good items. Of special note here is that this study only covered a short time frame of only 6 months.

Yet another study that specifically focused on how well stocks of delisted company performed compared to those not delisted from 1998 to 2005.  Note, it was a small sample size and they were delisted, but not in bankruptcy.  That being said, they noticed two major advantages that they had over their counterparts.  First, they were neglected meaning investors had low expectations.  Second, having such depressed prices make for a potentially favorable starting price.  Additionally, the median 12 month return was about 14.5% for the delisted ones vs. about a -0.24% return for those remaining on the exchange.

Now letís look at a longer term view. The median return for 5 years for the delisted was 31.4% return to about a 2.0% return for the listed stocks.  This area does require a good amount of research to determine which specific stock is worth investing in for above average returns.  Over time we have found that on occasions and under the right circumstances a company comes back from the grave at it were and is more often over looked, out of favor and thus much undervalued by Mr. Market.  And we have seen above average returns using the strategy over the long-term provided the fundamentals are good.

We have disclosed some specific investment opportunities using the above strategies to our subscribers to our PWC STOCK REPORTSSM subscription service. They have access to our security analysis pointing to companies with above-average returns over the long-term.  

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 7/1/16




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