Off-the-Wall Q&A

Question: Are there any corporate "tells" that help you separate companies that are knocked down by having temporary problems from companies that aren't a place to put any money?

-- B.H.

Answer: The most ignored financial statement on Wall Street is the balance sheet. Many people fixate on earnings and the income statement, but the balance sheet is what determines the flexibility that management has to effect a turnaround. Debt-laden companies like Lucent (LU - commentary - Cramer's Take) and Advanced Micro Devices (AMD - commentary - Cramer's Take) have very little financial flexibility. There's no room for error. Other companies, such as Schering-Plough (SGP - commentary - Cramer's Take), have very strong balance sheets, providing management with plenty of options -- and plenty of time -- to try to turn around the company.

Another area to review is corporate governance, which is often overlooked. For example, take a look at a few years' worth of balance sheets at Cigna (CI - commentary - Cramer's Take). The company has made huge capital-allocation blunders, including the repurchase of shares at prices well above $100. Cigna is the only health insurance company that isn't knocking the cover off the ball; witness the outperformance of UnitedHealth (UNH - commentary - Cramer's Take) and Humana (HUM - commentary - Cramer's Take), to name a few. Cigna's weak board of directors provides little hope for frustrated shareholders; it's chaired by CEO Edward Hanway.

Question: If you're in the asset management business, what is the key to success?

-- K.S.

Answer: Be different. Lean against the wind. Question anything and everything, especially "conventional wisdom." In the distribution of outcomes, the vast majority of investors, also known as "the crowd," are quite ordinary, or mediocre. The key to outperforming the crowd is to do something different, to act differently than the crowd. That gives you a chance to be an outlier on the distribution curve, either a distinct outperformer or, unfortunately, an underperformer.

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Taking On Readers' Stock Questions

The Turnaround Artist Answers Readers

Question: Would you not agree that black holes in space are actually windows to other universes -- and that the reason our universe is expanding is due not to dark matter, but to the fact that more stuff is blowing into our universe than is blowing out?

-- B.F.

Answer: Absolutely! I thought everybody already knew that...

Next Week's Q&A

There is no such thing (in my world, anyway) as a perfectly priced stock. Every stock is mispriced -- some by a little, some by a lot. Send me your questions on specific stocks that you think are very undervalued for the Aug. 8 Q&A or very overvalued for the Aug. 16 Q&A. Let's see if we agree -- send me an email.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. At time of publication, Alsin and/or ACM was long Schering-Plough and Humana, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.