NEW YORK — You can hate the cars but still love the stock.
Lost in the flurry of headlines recently about Toyota Motor's recall over faulty gas pedals and brakes was news of a remarkable feat for an automaker these days:
The Japanese company actually made a profit last quarter.
Which raises an intriguing possibility: If Toyota strings together more profitable quarters, will investors kick themselves someday for missing a chance to have bought on the cheap?
Sean Thorpe, co-manager of foreign stock investments at Reed, Conner & Birdwell in Los Angeles, thinks so. He'll talk your ear off about his profit estimates for Toyota and where he thinks the stock, down 19 percent in three weeks, should be trading.
But the specifics of his argument, or whether he's even right, are less important than his instinct here: Buy on the bad news, not the good.
It's a tiresome bromide, but the fact is, investors frequently do the opposite. The history of investing, and during recalls in particular, shows this is often a mistake.
* Stock in Merck & Co. hit a nine-year low in October 2004 shortly after it withdrew its painkiller Vioxx, linked to heart attacks and strokes. The stock has had a bumpy ride in the past five years but is up 27 percent vs. a 10 percent drop in the Standard & Poor's 500 index.
* Johnson & Johnson shares plunged in the early 1980s after it pulled Tylenol from shelves amid a cyanide-lacing scare and, later, competition from newly approved over-the-counter versions of the painkiller ibuprofen. But the worries blew over, and the stock tripled in the three years through April 1987.
* Intel shares fell 8 percent in eight trading days on speculation in December 1994 it would have to replace its flawed Pentium chips. Once a recall was announced, the shares quickly retraced losses, doubling over the next six months.
"Recalls can be a buying opportunity," says Gene Grabowski, senior vice president of crisis manager Levick Strategic Communications. "There's usually a substantial blow to the shares, but they typically climb back in five or six months."
Buying on bad news has been the route to riches for many famous investors.
The late philanthropist John Templeton, for instance, made a killing scooping up slumping shares in dozens of companies in 1939, and with borrowed money no less. Warren Buffett bought stocks during the bear market of 1974.
Then there is Prem Watsa of Canadian insurer Fairfax Financial. He bet against the S&P 500 while everyone was buying stocks in the late 1990s before the dot-com crash. More recently, he amassed insurance contracts that paid out on corporate defaults before the credit crisis. Fairfax stock has doubled in the past five years.
Of course, there have been plenty of examples of bold investors who got it wrong. One with mud on his face recently: Joseph Lewis, who put $1 billion into Bear Stearns before it collapsed.
The question for Toyota investors: How much worse is the news going to get before it gets better?
Rebecca Lindland, an analyst at researcher IHS Global Insight, suspects a lot worse.
"This is a company used to accolades, not accusations," and it may not have faced up to all the problems with its cars, she says.
But Thorpe, the Toyota bull, thinks the wind is at the company's back. His bet is that recalls will be a "vague memory" in a few years. So does car retailer AutoNation CEO Mike Jackson, who said Thursday that he expects Toyota to quickly regain "most of the share that it lost" to competitors.
Thorpe's prediction: The company's U.S. shares, called American Depositary Receipts, will fetch at least $100 a piece in three to five years, up from a recent $74.60. If they rise that much in three years, investors buying now would see their money compound, before dividends, at a 10 percent annual rate.