Investing in Beaten-down Stocks

I am very thankful for the recent issue discussing beaten-down stocks and their prospects for recovery. My question is what parameters do I use to identify beaten-down stocks that have a high potential to rebound?

- Vinod Shrivastav 

Editor Responds: Thank you for writing to us. While it can be profitable for speculators and for value investors, investing in beleaguered companies should come with an adjusted set of rules. One should not overextend with an initial large position. Furthermore, debt should be vigorously examined. This means going as far as knowing the covenants and knowing what portion of the debt is due, and when. Compare this with the company’s operating cash flow for a quick feasibility check on its ability to repay debts. You can look for litigation issues keeping the stock down and find the management’s comments on the situation, along with any specific outstanding court cases which companies must disclose in quarterly and annual reports (10-Qs and 10-Ks, respectively). We hope these tips help. Happy investing!