Question

Topic: A company with historically strong, financial performance may not be a good investment. Conversely, a company that had historically marginal financial performance may, in fact, be a good investment. Explain this paradox, and provide examples to support your position. Consider the concept of intrinsic value in your discussion of this paradox.  

Answer 1

This concept that we are talking about is called "VALUE INVESTING"

Historically, if a company has been doing very well it does not mean it will do fine in the future as well. The historical earnings of the business may have been excellent, but the earnings are about to peak and in future the expected earnings may not be that good. On the other hand, if we take another company which historically has not been performing well for the last few years due to a lot of headwinds and we see that these headwinds are slowly turning into tailwinds and then the company is expected to do well in the future and have good future earnings growth.

Example: We may have a stock like "Bank of America" which has been historically doing well, many analysts feel that the peak of this company in term of earnings is already here and hence the investment in Bank of America may not be such a good investment

On the other hand a stock like "Fitbit Inc" which ash been underperforming for a last few years has potential to outperform in the next few years since it has invested a lot in R&D and they are beginning to pay of the business in terms of new products. So this case can provide an excellent opportunity for investors to make money.