Can You Make Money By Investing in Stocks of Bad Companies?

A bad stock is only bad when it has no potential to grow. Finding the best companies or stocks might not always be the best option.

Take a look at these two stock investment scenarios: Stock A is a business that’s doing very well. It has had a steady growth for years now and has a share price of N50 with very mild volatility. Stock B on the other hand, is a company that has been doing terribly over time.

The company has had a bad patch in recent time and had been retrogressing over this period. Its share price is N10. Both companies belong to the same industry and were once comparative. If you were to choose a company to invest in, which would it be?

Of course, this question is not as easy as it seems. You have to consider risk, the level of speculation involved, the growth potential of both dividends, and so on.

However, if both stock prices suddenly become N55 because of a positive change in the industry across board, stock A would have grown by a small margin of 10% but stock B would have grown by a whopping 450%.

Even if stock A moved from N50 to N55 and stock B only moved from N10 to N35, stock A would only have moved by 10% while stock B would have changed by N250%. This is only necessary when the value of the company and share prices grows to hit a new moving average whose jump you had benefitted from.

While company A was the better business, company B was the better stock here – especially if the new level of growth is not caused my volatility but by the occurrence of tangible and sustainable events in the company.

No doubt, this is a very rough theoretical example. However, it gives one thing to perspective: A bad stock is only bad when it has no potential to grow.

There is an art to investing in stocks and most of it is centered on a number of objectives. It could be in terms of increasing the value of the investments through growth, earning income via dividends, or curbing/ curtailing losses.

As such, any investment decision that does not move the investment forward is a liability. What this means is that as a long-term investor, you would opt for the company with the best economics, potential, and possibly trend to invest your capital and allow the investment grow for the long term.

However, the truth is that finding the best companies or stocks might not always be the best option. You can actually make money by owning the stocks of bad companies, thus making significant investment returns by purchasing the least attractive stock in a particular industry especially if you believe that sector or industry would go full circle and make a turnaround.

The company might be making positive changes that would ensure they bounce back or it might be an amazing stock that is going through down times and would turnaround.

However, there are things that should be in place.

For starts, investing in a company that is apparently not doing well is pure speculation. You might believe there would be a drastic change but it isn’t assured until it actually happens.

In essence, you need to purchase these stocks with spare capital. You must also be ready to deal with the flip side. A bad business can give you a whole lot of stress and might be a waste of money.

It can swing in any direction – positive or negative; you just need to be ready for what’s coming.

Written by Lawretta Egba.