Not going deep enough
It’s always a shame when my research uncovers something bad. But even worse is when I forget that many problems are in the distant past. A recent example is when I reported on Cardinal Health Inc (NYSE:CAH), which had issues in 2007. Those issues were completely gone by August of 2009, and in fact the company’s focus has long since completely shifted to another area of medicine. But I didn’t find that until a more enlightened individual informed me of this.
I inadvertently gave Cardinal Health Inc (NYSE:CAH) a black mark it did not deserve, and this has potentially deep consequences. For one thing, I almost accidentally wrote off what could prove to be a great investment for my own portfolio once the Fool’s rules allow such a thing. For another, I may have steered others away from Cardinal Health Inc (NYSE:CAH) who were considering it — without any good reason to speak ill of the company.
While I wouldn’t want to overestimate my influence, any negativity can spark a panic-sale — the market can be a crazy, reactionary place. If you were around in 2008, you might still have nightmares of companies simply disappearing almost overnight, or of it losing 90% of its value and still not recovering much of it.
I could have steered clear of this problem by using more sources for my research and by spending a little more time on the company before rendering judgment. This is a valuable lesson to learn, not only for me but for everyone who fancies themselves decent stock pickers. Make decisions quickly, but take in all the facts first.
Now that I’ve done my homework, I’ve found that Cardinal Health Inc (NYSE:CAH) is a good investment idea for several reasons. For one, its free cash flow has been on a steady rise for several years; it’s $948 million as of the first quarter of 2013, so there’s plenty of money available to expand. Further, the company’s management is confident enough to have recently raised the dividend by 10%. Beyond both of these admittedly short-term positives, Cardinal Health Inc (NYSE:CAH) is breaking ground in the field of medical diagnostics. In a world where more people are sick every day, being able to identify an illness at its earliest stages and stamp it out is potentially worth a fortune.
Looking for problems until one finds something
Years ago, I was a Netflix, Inc. (NASDAQ:NFLX) shareholder. As you may know if you’ve read my posts in the past, I tend to eschew larger and better known companies because the world already knows their stories. But back in the day, I thought I had to find problems everywhere. So I looked and looked with Netflix, Inc. (NASDAQ:NFLX).
The “problem” I found wasn’t a problem at all with the company. I considered the nature of mail-order movies — this was before the days of streaming — to be an inefficient way to rent. I figured that people wouldn’t want to wait for a movie, and that they wanted to see their preference right now. So I gave an edge to brick-and- mortar rental places and sold Netflix, Inc. (NASDAQ:NFLX) — back when I’d made a modest profit from the stock and it was trading at $17 a share.
Had I considered the reduction in margins that even the mail-order method had, I would’ve probably foreseen Netflix’s gargantuan potential. Had I considered that Internet speeds were rapidly growing in the early part of the century, I also might have foreseen that streaming would eventually become a reality. Should’ve, could’ve, would’ve, as the saying goes. As of this writing, Netflix, Inc. (NASDAQ:NFLX) is trading in the $220 range per share. I missed out on my first 10-bagger because I looked for a “problem” until I found something.
The biggest lesson to be learned here is that in our efforts to find problems that will keep us from making a bad call, we need to remain open to a potentially great company that can put a lot of money in our pockets. Sometimes it’s best to hold on and let the company do what it does best.
Speaking of that, I believe that Netflix is still a solid investment. The major reason is because it has shown again and again that it can grasp and utilize new technologies and adapt its business model accordingly. The secondary reason is because Netflix, Inc. (NASDAQ:NFLX) is investing heavily into new streaming content and amping up its business.
The company’s future is dependent on striking deals with content creators, and this is precisely what Netflix is doing. Your share price and earnings multiple thresholds may be different than my own, but Netflix, Inc. (NASDAQ:NFLX) still has strong growth prospects over the long term. I would suggest picking a price that appears to be a decent deal and plunging in.
Making mountains out of mole hills
Lately the auto companies haven’t been doing as well as in their heyday. Ford Motor Company (NYSE:F) has gotten a lot of bad press, much of which it hasn’t deserved. While the big auto companies have had to deal with recessions, changes in consumer tastes and labor issues, among other things, on the whole they’ve still managed to do decent business and pull in massive revenue.
Many of my fellow Fools have noted that Ford Motor Company (NYSE:F) is actually on a positive turnaround trajectory. While it would be easy to point out that Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) have both had serious losses in the European market, those losses appear to be shrinking. Also, Ford Motor Company (NYSE:F)’s plan to get its act together is working well in the US — and may end up translating well into both the European and Asian markets.
Yes, Ford and other automakers have had trying times in recent years. But when you consider that several of these companies are more than 100 years old and rolled right through the Depression, a missed beat or a poorly-received product here and there is nothing to get in a twist over.
The past is great, but Ford Motor Company (NYSE:F) is coming back right now. The F-Series pickup is the best-selling vehicle in the country. The Focus is in seventh place. The Fusion is in 10th. The average increase across these three vehicles was 45% as of February, which is better than any other company is managing.
The lesson I think we should all take from this is to accept that there is no such thing as a perfect investment. Every company has its problems. The trick is to suss out which problems are relatively minor versus which ones are likely to torpedo the company’s value. This is a challenging undertaking, to put it mildly.
The Foolish bottom line
Research is the key to both good articles and good investing. It is every investor’s responsibility to put in the due diligence, spot the great but hidden opportunities and dodge the value-killing bullets. I will do my best to keep this in mind as I continue to write articles in the future.
The article The Importance of Deep Research originally appeared on Fool.com and is written by Chris Hodge.
Chris Hodge has no position in any stocks mentioned. The Motley Fool recommends Ford and Netflix. The Motley Fool owns shares of Ford and Netflix. Chris is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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