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What if this is the cheapest business on the ASX?

A decent rule of investing is to never buy or sell a stock immediately after a substantial rise or fall. This is easier said than done as the fear of missing out takes hold resulting in a loss of patience and irrational decision making.

Contrarian investors will buy companies that have experienced substantial price falls in the belief they can make big profits by contradicting conventional wisdom to buy companies oversold as a result of weak sentiment around them.

One candidate is online travel operator Wotif.com Holdings Limited (ASX: WTF). It’s had investors asking what if this company’s been way oversold due to gloomy media reports based on dubious assumptions?

The stock has halved in value since May last year after announcing FY 2014’s first-half net profit was down 18% on the prior period. The group attributed the decrease to increased costs from strategic investment in marketing and technology, whereas the price crash is reflective of the profit fall and market worries that big U.S. competitors like Expedia and Priceline will muscle in on its market share.

Wotif’s days of decent growth look gone, but it still has a huge established customer base from which it can find new ways to leverage.

On current numbers it looks cheap, especially if you believe the prophets of doom have over-exaggerated the potency of the competitive threats. Selling at $2.65 the price-earnings is 13 based on analyst consensus forecasts, with Wotif stating volatile conditions prevent it from guiding as to full-year earnings.

If it maintained the interim dividend payout for the full year it would be yielding 7.54% fully franked, although the last dividend was supported by a payout ratio of 93.5%. Overall though the business looks an opportunity for investors prepared to take a contrarian approach.

Other larger companies to have taken a sudden tumble after earnings downgrades recently include Metcash Limited (ASX: MTS) and Coca-Cola Amatil Ltd (ASX: CCL).  Both appear to have been somewhat unresponsive to competitive challenges and an Australian economy stuck in the slow lane recently. As a result both have strategic rethinks ahead to turn it around.

Foolish takeaway

Any company can experience short-term problems that filter through to earnings soon enough, the challenge is to identify and fix them to return to growth. Of the three above, Wotif, as the smallest has been punished the most, and I think may present the best opportunity for an investment approach contrary to mainstream sentiment.

Where to invest $1,000 right now

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Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

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Motley Fool contributor Tom Richardson owns shares in Metcash Limited. You can find him on twitter @tommyr345

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