One way to make some good cash would be the timely buying of stock of a [valuable] company which for some reason drops sharply, hold them for while until the company recovers and the stock prices bounce right back up. It could be sort of risky though because there is no guarantee that there'll be a recovery and if stock prices keep dipping, you'd have gambled away your money. What do you think? Is it a wise move to buy such stock?
I'm assuming this question is being asked because of what's happening to Volkswagen at the moment? In this case then I don't think that there's any danger that over time their price will recover, as people tend to have short memories when it comes to things like this, I wouldn't have thought that many people in the world would stop buying a brand of a car, just out of principle.
There are no free rides. Market-timing comes with risk. What seems like a good buy opportunity could simply be a reflection of a bigger long-term problem for the stock. I'm not saying it wouldn't be a good opportunity when you look back upon it, but make no mistake about it, you took on all the extra risk of an individual stock while trying to be cute and time the market. So as for your question about it being a WISE move, I would say it would be wise if it was at least in a basket of other stocks you are timing so that you have some diversification. I would also add that it would be wise, as a general rule, to not put important money in those stocks if you may need to sell them in less than a decade.
I think instead of just looking at the price at face value, rather do a simple exercise to confirm if the stock is undervalued at the point following a large drop. Some stocks don't recover from large price drops, and that might have to do with the intrinsic value, the stock could have been overvalued or there could be a fundamental shift in the business. For some companies the large price drop is the beginning of the end. I guess it also depends on how long you're wanting to hold the stock for. If you want to hold onto it indefinitely then the analysis wouldn't really matter, you'd just need to determine whether you believe the company will continue as a going concern. If you're wanting to hold the stock for a shorter period, cause you want to profit off of the large decline in prices then also do a fundamental analysis on the company to see where it's true value lies.
My biggest regret was not having the guts to buy Ford $F with both hands back when the price was flitting around the $1 level at the time the company refused the government bailout money. Still made some money later on, but what could have been... Yes, I know. We all have similar missed opportunities stories.
Why did the stock suddenly decline? They rarely do it on their own for no reason. By examining the reason for the decline, it's easier to see if the decline was justified or if the market just over reacted. (which does happen) So basically you are wanting to bet on the fact that the market over reacted and the price will soon bounce back up... in that case you better be confident that it really is an over reaction instead of something that is going to damage the company's earnings in the future, which would justify the new, lower, price tag.
Why did the stock decljne? There undoubtedly will be a large hit to earnings, a loss of new car sales, and owners are already complaing of falling trade-in/resale values. The USA EPA mentioned some $18bn in fines, plus remediation costs. Virtually the entire EU, Japan, South Korea and other countries are jumping in with similar actions and demands. You can look at the earlier messages for details. This morning I saw an extensive report on Sky TV about the unhappiness in the UK; dealers, mechanics and owners were not happy.
And keep in mind that Audi and, probably, most of the top European car manufacturers will be busted as well. I'd make some cash reserves especially for these events and go all in. At some point, they will rebound for sure. Obviously, this is not a good advice for the day traders, but for those looking for opportunities or looking forward to building a portfolio, I think this situation is a train you don't want to miss.
If it's proven that the whole motor industry is at fault and its looking like it might be, then there could be quite a few dips in the market coming up. The thing with a lot of these firms though is their ability to ride out the storms, and a lot of that is simply because of brand loyalty. Volkswagen make good, reliable cars and people know that. Just because they have been caught out massaging the emission figures doesn't alter that fact, so in time, when it's all blown over the stock will recover.
I often buy "damaged stocks". But you have to do your due diligence, and there are certainly no guarantees. Sometimes oversold / undervalued stocks come roaring back very soon (particularly many oversold biotechs). But often it takes time, and other times they continue to slide and even occasionally become worthless. You have to do your homework, and not put too many eggs into any one basket. Try to determine if it's just temporarily oversold, a hidden gem trading at a discount, or if it is just a "value trap", or whatever. Aside from the cheap price / decline in price, look for the usual things that make any stock attractive - preferably strong recent accelerations in sales and earnings, margin expansions, low PEG, higher than average return on equity, etc. And having innovative and unique products and services and other competitive advantages, fairly high daily trading volume, and strong institutional ownership is very important.
