Investors have suffered through enough corporate mismanagement over the past five years to bring on an ulcer; especially if those investors believe that corporate bungling affects stock prices. Mergers, acquisitions, and super-spy antics add to the impression that blue-chips, high-end tech stocks, and super mega-store shares might be riskier to own than a portion of a little-known mini-business located in Australia's bush country. Add a few other bad news scenarios like downgrades or rumors, and you might wonder if investing is even worth the trouble.

But, every black cloud has a silver lining (so my grandmother said), and that lining might be called a contrarian, or a person who thrills to find the positive in the negative. An opportunity to pick up solid corporate shares that have suffered a price cut through bad news might resonate with you. But, how do you know whether the stock is truly dangerous or if it's in shape for a future upgrade?

First and foremost, I would never advocate reacting to any bad news with share purchases or sales based on emotion. If you own shares in a company that reveals bad news, you might sit tight until you hear what that "bad news" is about and what it means to that company's future. Just remember the adage, "buy low, sell high," to keep your wits about you, because if those shares are dropping, it may not be the time to sell. But, it could be the time to purchase more shares if you know that company inside out and if you know that the bad news can be weathered?

Say, for instance, that you know about a company that has expanded, reduced debt, increased production and profits within the past few years, but you also know that the stock price has dropped despite this growth. In this case, some analysts might have questioned whether this mega-corporation could continue to expand, as its growth may begin to reflect the rate of the general economy. When analysts start to downgrade stocks despite growth potential (potential that sometimes includes larger dividends), then it's time to stop listening to analysts in my opinion. All the analysts have done in this instance is to change the company's valuation. This is not bad news. The company is solid, the price is low, and it might be time to buy.

I do avoid one "bad news" scenario when I consider a purchase, and that news usually contains something about "accounting troubles" and "bookkeeping mismanagement." There is a difference, though, between minor and major bookkeeping bungling. Think Enron or WorldCom and you have an idea about what I mean by major trifling. When one board member or employee is caught stealing from a large corporation, that's another matter altogether. That latter problem is a wound that can heal if that company is strong and if it reacts positively to the news.

One positive reaction that a company can make includes share repurchases or buybacks during a company crisis, as this action provides one means for a company to patch its image and to increase its share price at the same time. When a company repurchases its stock at a lower price it increases the value of the remaining shares on the market because fewer shares mean more valuable shares. This action also provides investors with a source of long-term profit, and it provides some proof that the company is willing to restructure its image as a valued commodity. This might be one instance where a stake in that company is worth the risk.

On the other hand, if you notice a buyback or any major stock purchase that a company makes during a bull run or when the share price seems overpriced, you might wonder where that company is headed. That money would have been better spent on assets that can be easily converted back into cash rather than spent on overblown shares. If you look deeper into a company that makes a decision like this you might find other problems as well.

In a case where you find a company that doesn't seem worth your time or money, you might consider a change of heart if you hear that company has changed management. Good management could make the difference between mediocre stock performance and a prize investment. Since you already know the company, all you need to do in this instance is to research the new management. You can do this online by typing the person's name into a search engine. If nothing comes up, then I would be suspicious. Good managers usually strive for an online presence that showcases their achievements, whether it's through press releases, media coverage, or simply through a personal Website.

What you use to valuate management is up to you. I tend to be harsh with my qualifications. In the end, however, a CEO who values high returns over a high-end Manhattan office is my cup of tea. High returns usually means that a profit will be realized, and profits often are shared with stockholders.

In the end, bad news isn't always bad. Bad news can readjust a stock price so that it's more affordable, more appealing, and possibly more profitable - and that's all good news if the company is based on solid growth and financials. The danger lies within a lack of research. And, I need to ask, just how easy is it to research that little business in Australia compared to a mega-business located right here in the U.S.?

Until Next Week,
Linda Goin

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. Any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy and past performance is no guarantee of future results.