According to a wise investor, there is a simple secret to successful investing. “Be fearful when others are greedy and greedy only when others are fearful.”

Sounds easy enough. Unfortunately, this adage is not absolute. Sometimes it makes sense to be fearful when others are fearful. Remember Enron and Worldcom… But if savvy investors can identify a company with temporary glitches and others fears unjustified, an investment in the company can be very profitable.

At mystockguide.com, we have found a company called Scpie Holdings Inc. (SKP) which satisfies this aforementioned criteria and recommended it in our most recent newsletter. Scpie, over the last couple of years, has ran into trouble by expanding its medical healthcare liability insurance business outside the state of California.

After realizing that the premium rates in other states were not large enough to support the liability payouts and taking big losses, Scpie has gone back to issuing insurance mostly in California. Unfortunately for Scpie, it will take some time before all outstanding claims in the other states are paid out.

Because of these problems, the stock price of Scpie has tanked. It has fallen from near $30 in early 2002 to $9. The problems will get resolved over the next couple of years and subsequently, the stock price should rise.

Individual investors can also find companies that are temporarily out of favor. The best way is to look at stocks that have taken the biggest hits. All major publications list the largest percentage losers for the day and week.

Another approach is to find cheap companies in cyclical sectors. For example, the housing industry in the next couple of years will suffer due to the rising mortgage rates. In fact, some of the smaller players such as Dominion Homes (DHOM) have already seen their sales and stock price drop. It’s already trading near its book value. Although, Dominion and other housing stocks are not cheap enough for us to buy yet, they might be in the future.

Finding temporary fads affecting good companies is another way to profit. Right now, the growing number of people on the Atkins Diet has lead to lower profits and stock prices for Doughnut maker Krispy Kreme (KKD), bakery-café Panera Bread (PNRA) and diet center Weight Watchers (WTW). Although a lot of these companies are trading near or below their 52 week low, they are still expensive. Panera Bread still trades at over 30 times earnings.

If the investor fully comprehends the business and strongly feels the problems are transitory, then the investment can be profitable. However, investors should understand that this type of investment is very risky, if all the necessary homework is not done.

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