Warren Buffett famously says that the time to invest is when "blood is running in the streets." Investing in great companies that have fallen on hard times has been shown to be a highly profitable strategy, but it takes courage. Every now and then, however, what the market views as bad news is in fact great news for a company. A contrarian lives for these situations, and it's going on right now with Insituform (INSU).
You may recall Insituform from our recent article on investing in water stocks. Their core business is a patented technology for repairing deteriorated water pipelines without the staggering expensive of excavation and replacement. Their technique is quite ingenious. They insert a specially-designed bladder into a pipeline. The bladder expands until it lines the inside surface, sealing off any and all links. The material making up the bladder is strong and flexible, and makes for a lasting repair, with no need to dig up the pipes. This is known as in situ reconditioning (which explains the company's rather odd-sounding name).
The state of the water infrastructure in the U.S. is a dirty little secret. It is in fact in woeful shape, and deteriorating rapidly, as any municipal utility worker will verify. Many of our older water lines are actually made of clay, which as you might imagine is highly vulnerable to cracking and corrosion. Insituform's technology can make even these old clay pipes effective for many years to come. Naturally, demand for this product should experience explosive growth in the years to come.
The trouble is that, for much of its history, Insituform was carrying some serious deadweight in the form of a tunneling division. This division was expensive and unprofitable. In late March, however, the company finally announced that it will be divulging the division. This is great news for the company, as it means it will be focusing on its core business, which is a veritable cash machine with a rosy future. The market saw it differently, however. The company announced it will take a $21 million charge on the divestiture, and the shares plummeted 20%, approaching a 52-week low. We love it, the market hates it. A perfect time to buy.
You have a golden opportunity to get a great stock at a great price in a sector that's hot and will only get hotter. Take advantage while you can.
Full Disclosure: Author owns shares in INSU at the time of writing.
INSU 1-yr chart