Dont Buy Worldcom! A Guide to Wise Bottom Fishing

Over the past few months, several investment professionals have brought up the topic of the down-and-out company of the day and whether to buy now as a speculation. Last year, K-Mart was the big news, and everyone wanted to know whether this was a good stock play. Today the news is focused on WorldCom and its downfall. Thus, some people are pondering this stock for quick profit potential.

Here's the scoop: Don't buy WorldCom.

I know! It's impossible for MCI to disappear: they're too big, they're too popular, their service is excellent, etc. That's the good news that everyone is talking about. But there's another side a darker side to the story. The company filed for bankruptcy because of their massive debt load, not just because of accounting failures. The accounting failures probably only came to light as a result of the company's lack of funds.

In the end, it will be the same story as K-Mart. It won't matter whether K-Mart or MCI survive, the shareholders will not. If the business survives still debatable in K-Mart's case, but more likely in MCI's business ownership will be transferred to the bondholders and other creditors by law. This is what bankruptcy courts do. Shareholders get nothing. If you want to gamble on MCI/WorldCom, you might consider their bonds rather than their stocks, although that option may not be great either.

So, is it pointless to look at "down-and-out" stocks as quick turnaround opportunities? Well, we may avoid the "down-and-out", and instead just invest in the "down-and-uncertain". These can be awesome opportunities, but be aware that the risks are sometimes high among these downtrodden firms.

Here is a list of 25 of these beaten down stocks which today sell for under $5. Some are well-known businesses, other names are less commonly known. Some are dot.coms suffering from the fallout of that moniker, while some languish in other areas of high tech. The energy market has taken more than its share of hits since Enron's collapse, and that industry is well represented on the list. Telecom, still reeling from WorldCom's collapse, is also present. For variety, the list includes everything from media to education, from international trade financing to pencil-graphite production.

If you're convinced that buying the beaten down is the best way to make money, this should provide you vastly better choices than K-Mart or WorldCom. Anything on this list is better than those two doomed stocks. While a few are pending investigation (*starred), most have fallen simply because of the whims of the market. Some are even maintaining profits in this tough environment.

With the market in the doldrums, out-of-favor companies sometimes fall more than would be rational. As a result, you might find great buys in stocks like this. But in this market, there are great buys everywhere. The question is when to buy.

Market timing is not necessarily wise, but when the market is falling as harshly as it has been, one can afford to wait until the stock is so low that you are virtually certain it can't go lower. Some of these stocks have reached that level.

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Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.