Stocks & Basketball: March Madness Loves an Underdog

Charlie Smith in Investments 17 March, 2016

March Madness is upon us, and as our regular Ramparts readers know, we love looking for the underdog and spotting a potential upset. This reminds us of the 2010 Butler Bulldogs who had an incredible run in the NCAA tournament. As a number five seed, they made it to the finals only to lose in the last seconds of the game to a powerhouse, number one seed, the Duke Blue Devils. Even with that loss, the Bulldogs were the ultimate underdog team with a 25 game winning streak entering the final game of the tournament.

Underdogs in March Madness are much like underdogs in the stock market. If you put in the time and research to make the right pick beyond what everyone is talking about, then others will start to realize the team (or company) is doing better than expected, and will want to hop on the bandwagon.

So how do you spot a worthy underdog stock? Well, they most likely aren’t at the top of the leaderboard and haven’t outperformed the market in recent years. First, look for a company that hasn’t seen gains in the recent past, but still looks like it is growing or could grow. Then figure out why it hasn’t been loved, what it’s lacking? Maybe the company is in an industry that hasn’t been showing growth, or the company has made some missteps in the past. But it’s important to see if this can be reversed or changed for the company and industry.

Most great teams won’t make it far without a great coach. Strong leadership and guidance is essential to make it through March Madness. The same goes for company leadership, look for companies with top management with a good track record. A company may be a rising underdog if the current leadership has previously rebuilt and fixed problems to turn a company around.

A valuable team plays for their school and for pride, not individual glory. Equally, a valuable underdog company talks about their shareholders and demonstrates an understanding of who they work for. Such companies have done things like buybacks and increased dividend payouts. Additionally, understanding what a company does, how it works and what their philosophy is, is essential for a buyer. Without an understanding of the company, it’s difficult to know if the company is of value.

Betting on the team that made it big last year just because they had a good run is also not an advisable strategy. As is going after last year’s darlings that may have fallen down. This can be a trap.

It’s typical to go for the big names, but it’s often that some big seeds are highly over valued and go down early. For companies, like basketball teams, it’s important to see who has good fundamentals. Putting in time to research what’s behind the company’s philosophy and strategy is important to understand if there is value under the surface.

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