Buying undervalued companies can be lucrative but can also expose you to deteriorating businesses; some are cheap for a reason. The question to ask: is it blemished or rotten to the core? "We have always liked the analogy between shopping for fruit and value investing," says Jacob Wolinsky at Trapeze Asset Management. "It's our job to determine whether a business has sold off because of a minor blemish, one that could be cut out with a paring knife, or whether it’s rotten to the core. We are looking for opportunities where there was a short-term disappointment, industry concerns or news flow that sparks uncertainty, which unduly depresses a company’s share price. And we do find ourselves passing over businesses all the time because they might be spoiling — they aren’t undervalued or are overly vulnerable, for example, to competition, cyclicality, regulation or a single customer but these companies might have too many moving parts, too many competitors or are too levered and therefor...
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