Who doesn’t love a great story? Big companies pay big bucks to employ ‘corporate storytellers’ – marketing gurus who create compelling stories to make their clients’ products seem more vital, their management teams seem more brilliant— and even their stock seem more attractive.
So how can an investor see through the marketing angles and avoid getting caught in a narrative trap? We’ve parsed a few of the more common stock narratives and offer these suggestions for keeping it real…
The Turnaround Story
- This is a stock trading at steep discount to its all-time high.
- This is a stock in its darkest hour.
- No one loves this stock.
- It’s typically an older company going through hard times.
- The company is likely carrying too much debt that now weighs on its stock price.
But… if its margins are improving, or it recently refinanced its debt or it restructured operations, there may be hope on the horizon.
Keep it real: The best kind of turnaround company is not sexy. Nobody on Twitter talks about it. Expert investor Fabrice Taylor suggests boring industries: “Bus making, duct tape, manufacturing, airlines, engineering, power generation – simple things that are easy to understand and there’s always been demand for and always will be demand for.”
The Bargain Stock Story
- Value investors seek undervalued stocks trading at significant discounts to their book value or their intrinsic value.
- These companies are going through hard times.
- Buy-and-hold investors will stick with them to the other side despite their lagging performance.
Keep it real: Make sure the company has high quality management and improving fundamentals to warrant its bargain price. As Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
The Defensive Play Story
- ‘Defensive play’ investments are considered safer, slower-moving, reliable companies that are less at risk during a market or economic pullback.
- Also known as “recession-proof” or “non-cyclical” stocks – these companies are typically found in industries such as consumer staples, food & beverage, utilities, energy, health care, utilities, and telecoms.
- They often come with hearty dividends to make up slower stock price appreciation.
Keep it real: Look for companies whose products are “needed” vs “wanted” and whose demand won’t shrink when consumer budgets are tight. Check for a dividend track record that is strong and consistent even through tough times.
The High Potential Story
- You may recall dating this stock in high school.
- Fast growing, a little bit flashy, and definitely risky.
- Could go either way, really, and there’s always a chance they get taken out by a bigger fish.
- These stocks get chatted up on Twitter and they garner as much attention from fans (longs) as they do from haters (shorts). The latter category is often comprised of former longs who sold too soon.
- These stocks shoot for the moon – regardless of profits or lack thereof.
- Never underestimate. Never put baby in a corner.
Keep it real: Look for growing revenues, especially over several timeframes. With these companies, “who they know” can be as important as “what they know” – look for strong relationships with big, high profile clients who love their products, consider them invaluable and send them more business over time.