Street Sense:The fundamentals of stock market investing
Great Companies Can Stumble
Corning, for example, says business will be bad for at least a year. But what does that mean to the savvy investor?

Corning, Inc., the company that started the telecommunications revolution by inventing fiber optic cable, recently announced that its huge telecommunications business has virtually ground to a halt and probably won't recover until late next year or sometime in early 2003. Corning had mistakenly assumed that the rapid buildout of fiber optic communications networks would continue and spent heavily to be able to meet the expected strong demand.

This means that Corning, a highly respected and innovative company that's best known by most Americans for its Corningware cookware, won't be reporting much in the way of profits for quite a while.

Clearly, this is bad news for Corning and for the thousands of company employees whose jobs are in jeopardy. But what about the prospects for Corning stock over the next 12 to 18 months? Will the stock move in lockstep with the company's declining profits?

Not necessarily.

EVALUATING DEPRESSED STOCKS

One school of thought on Wall Street says investors should avoid stocks reporting any kind of bad news. They reason that the best way to make money in the stock market is to buy stock in companies that are growing sales and profits, and then stay with those companies as long as the growth trend continues. Corning doesn't fit that description right now.

But another school of thought says it's a good idea to consider investing in a high-quality company that's temporarily struggling, as long as the company has been honest and forthright in presenting the bad news.

Smart companies with temporary problems will often lay out a "worst-case scenario" that will include layoffs, inventory writeoffs and extraordinary charges against earnings. Company management knows that this kind of dire news will drive their stock way down, but they also know that by taking strong and decisive action, they've cleared the decks for a future profit recovery.

Corning came out with a "worst case" forecast in July, and saw its stock fall into the low teens. In 2000, Corning stock (symbol GLW) had traded above $100 a share.

STOCKS MOVE AHEAD OF NEWS

So what's an investor to do?

If we look back at stock market history, a quality company's stock will typically hit its low point at just about the time the news surrounding the company is at its worst. Then, while the news is still bad, a few intrepid buyers will slowly begin accumulating the stock at bargain basement prices. Eventually, there will be enough of these buyers to cancel out the remaining sellers, and the stock price will stabilize. The stock will actually begin to rise well before any favorable news from the company is announced to the public. Once some good news is out, the stock may already be up 40 to 50% from its low point.

Stocks behave this way because there are always some well-informed investors who understand a company better than others. When these informed investors see that a stock has fallen below its intrinsic value, they step in and buy. It's their buying that enables a stock to rise well before any business turnaround is apparent to the public.

Corning stock may well be "dead money" for the next 18 months, or it may have already hit its low. Only time will tell how long it will take for the company to overcome its current problems and resume its growth.

IT'S NOT FOR THE FAINT-HEARTED

One way to evaluate a stock such as Corning is to consider the company's track record. If the company has bounced back from adversity in the past, the odds are it can do so again. But you'll still need patience and a strong stomach to wait out the bad times.

Ophthalmology Management Associate Editor Jerry Helzner has written more than 50 articles on stock investing for Barron's. He has been a regular stock market columnist for other business publications and was a member of the equity research department of a major regional brokerage firm.