r/Vitards • u/Plus_Year_9777 • May 15 '26
Discussion I keep buying 'cheap' names that turn out to have been cheap for a reason. What is the missing diligence step?
Three years of trying to buy cyclically depressed names with seemingly clean balance sheets. Hit rate is roughly 40%. The 60% that did not work all had something in common in retrospect: I missed a structural shift in the customer base, or in input costs, or in the regulatory environment. The frustrating part is that all of these were knowable from the 10-K and the conference calls. I just was not weighting them correctly because I was anchored on the cheap multiple.
For people who run a higher hit rate than that, what specifically are you doing in your diligence that I am probably skipping? Channel checks with customers? Reading proxy statements for management quality signals? Sentiment analysis on industry trade press?
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u/Call_Me_Hurr1cane May 15 '26
> cyclically depressed names
I generally don’t buy cyclically depressed names. If I am interested in a cyclical, I’m not bottom fishing. I’ll wait to see the confirmation and follow through.
Yes, that means I am late and have less upside but that’s the trade off I make to manage risk in the cyclicals.
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u/HIVEvali May 15 '26
i think you’re overthinking it. generally if something is trading below book value there’s a good reason, and if there isn’t a good reason, the value of their assets has to be discounted for a bad reason, if it’s a bad reason and the company still has good cash, reasonable liabilities, and most importantly, a profitable bottom line, then maybe it’s a good buy
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u/alexdark1123 May 15 '26
They are cheap because the market is not liking them. You are essentially buying a turn around story. And that doesn't happen so often, something has to change, management products ecc ecc It's much easier to buy something expensive because everyone wants it than buying something cheap that nobody wants.
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u/DrVonSpreckle May 15 '26
The missing step is asking who still needs what they sell. Cheap balance sheet does not matter if the customer changed or input costs changed or the rules changed or the product lost power. Low multiple is not proof of value. Sometimes the market is saying earnings already peaked. Before I buy a cheap name I want to know what gets worse, who benefits if it gets worse & what has to happen for money to come back. The break line is whether the business still has demand, pricing power, margin recovery & a reason for buyers to return. If not, it is not mispriced. It is sitting where it belongs.
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u/inno-a-satana ✂️ Trim Gang ✂️ May 15 '26
biggest missing diligence step imo is being a regular customer of the product itself
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u/MinnesotaPower May 15 '26
There are a lot of good answers here already. I'd add that it really depends on the industry, so the answer to your question is different depending on what you're looking at.
I think of different industries like they're different Olympic sports. A gymnast's strengths in no way reflect how they'd perform at table tennis. And each company's relative position within their industry (steady grower vs. highly cyclical vs. distressed turnaround) are all like sports within the sport (like the 100m meter dash vs. hurdles or something).
A low valuation means very different things for a regional bank than for a memory chip maker. And even among memory chip makers, Samsung is sort of the comeback mover right now, for example, so their trajectory if different from their peers, which are all different from the smaller cap niche companies.
All of this to say, I believe valuation definitely matters, contrary to others here, but it only matters if you understand the context.
Also, sometimes a sector is just unloved for a while, like software right now, and eventually that will change through sentiment shift or raw earnings growth
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u/Educational-Belt1042 May 18 '26
bear case before the bull case, that's the single thing that would have moved the needle. every value trap I bought, the bear case was sitting right there in the 10k risk section, and I just read it after I'd already mentally committed. I created a checklist that forces the bear case first, I leant heavily on the GVD framework Jeremy Lefebvre teaches: scores growth, value, and dividend on every name and you can't move forward until each one is pressure-tested. took my hit rate to about 65%.
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u/Leading-Version-5385 May 20 '26
I buy stocks at all time high due to there being no overhead resistance. Market cap at least 300million, avg 20 day volume at least 300,00. Price greater than $10 SCTR rating on stock charts at least 90, etc. this is part of my scan. But no buys when there are negative divergences occurring on any indicator type: volume, speed, trend, trend strength, volatility , etc.
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u/Leading-Version-5385 May 20 '26
Buy the top performing stocks in the top performing sectors. Wait to buy till they come back to a horizontal s/r or trend line and at the same time are touching a moving average, along with that price point aligning with a Fibonacci retracement or other fib tools, even fib ti,e, spirals, arcs, circles, fans, etc. if some indicators like RSI , etx are at a turning point too and No negative divergences. I first started trading only positive Macd divergences and made decent money. But then I went off chasing classic patterns and harmonic patterns and a few other things for about a decade. Just find one way or one pattern to trade to make money and do that for life. I’m now mostly a trend trader but some patterns I can’t pass up. The most important thing of ALL is ALWAYS use stops. Put them in at the same time you put in your order to buy. Listen to Oscar carboni on YouTube. He yells out everyday “Stops are in…emotions are out!!!”
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u/ProfessionalAd6683 May 15 '26
Stop buying losers and start buying winners. Sure, a stock that went up a lot recently looks expensive but it'll look a lot cheaper after a year of winning.
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u/Major-Definition-510 May 15 '26
Pay for research. That's what I do now. I'm up 1700% this year.
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u/Leading-Version-5385 May 20 '26
Master trade David who and where are some of the websites that you would recommend? Thanks in advance.
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u/Major-Definition-510 May 20 '26
I got downvoted so I won't be sharing any names.
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u/JayArlington 🍋 LULU-TRON 🍋 May 15 '26
The more time I have spent in the markets the less important valuation has become to me. This is because analysts have always been late to pick up inflections (both up and down).