From the T2 March Letter:
Panicked Headline Investing
As value investors, we often invest in companies and industries that are deeply out of favor because that’s where bargains – babies thrown out with the bathwater – often lie. At the extreme end of this spectrum is what we call “panic headline investing.” The opportunity arises when something goes terribly wrong at a well-known company, resulting in very negative headlines that lead to the widespread view that the company is so toxic that its stock is uninvestable at any price – and thus panic selling. We love buying from sellers who don’t care about price.
Sometimes panicked headlines affect an entire sector such as financial stocks during the credit crisis and, to a much lesser extent, last August and September at the peak of the European sovereign debt crisis (we took advantage in 2008/09 with Berkshire Hathaway, Wells Fargo and American Express, and last fall with Citigroup and Goldman Sachs, among others). But during normal times, it’s usually something company-specific. A classic example is BP during the oil spill in mid-2010 (another one we profited immensely from). Over the past year, other examples we’d cite are News Corp last August (phone hacking), Hewlett Packard last August and September (management shakeup), Netflix last October (Qwikster debacle), Jeffries Group last October (MF Global bankruptcy), Sears Holdings last December (bankruptcy fears), and Diamond Foods in February (accounting scandal).
We look closely at all of these situations and occasionally invest in one. For example, of the six recent ones noted above, we invested in two: Netflix, which has been very profitable and which we continue to own, and Jeffries Group, which we have nearly entirely exited after almost doubling our money. Why did we invest in these two and take a pass on the other four? It’s hard to say – to some extent, after all of our analysis, it comes down to gut-level comfort. Given the success we’ve had doing this type of investing, perhaps we should try harder to get comfortable with these situations more often…