Method Two: Identify a Turnaround Stock
This is a very specific kind of stock. You are looking for one that had good times before, and something went wrong. I was going to say “terribly wrong,” but that is not the right way to say it.
I like the ones that used to trade on Nasdax or Amex and “fell off.” I really like them when they still have the same management in place and they are still in the same business.
You still need to do all of the checks you would do to see if they are really real, but generally these are fully operating companies that just could not keep the price and volume up as some investors lost faith and left.
If you are looking at medical stocks, you will see a lot of these. They had a great idea. It looked liked smooth sailing into the phases of drug approval, only to have some of the testing not quite work out a year or two ago. Instead of folding and saying “we tried,” they go back to the lab and try even harder. Now things are looking better. The price may be down 95%, but they have what they think is a viable product. Even if it does not work out, when they start putting out the releases about the process moving forward again the price generally starts moving up. Particularly if they are clearly not promoting and really appear to believe in what they are doing.
Other industries have similar stories. Oil and gas stocks now are exploding as the methods to get to the oil and the gas have so much improved. You’re not looking for a story here. You are looking for a company with promising land they can put into production.
Make sure you are not buying into a “pipe dream.” Make sure the story is genuine. They were once successful, and now it looks like they are again.
One quick note on what is NOT a turnaround:
Let’s say a company is in the “homeland defense industry” (whatever that is) and now has decided to get into the “medical marijuana and cannabis industry.” That is not a turnaround, that is a pump. Don’t go there. They never end well.