Learning How to Bottom-Fish, Part 2: Buying on the Cheap

Click here for Part 1.

For many investors, discounted cash flow is too futuristic a concept and it considers too many arbitrary factors. Jeff Matthews, manager of the Ram Partners hedge fund, often uses a much simpler approach that doesn't rely on too powerful a crystal ball and so many inputs. When scouring markets for companies that are having tough times, he looks for those that trade at, or below, 10 times what earnings could be two years into the future.

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He uses struggling retailer Nordstrom (JWN Quote) as an example. In its 2001 fiscal year ended Jan. 31, Nordstrom made 78 cents a share on sales of around $42 a share. Its operating margin for the year was only 2.4%. ...