(Business 2.0) – You may be the first to admit that you don't know everything about investing, but there's one thing you can be sure of: You'd have to be nuts to put any money into a company that's spending a lot of time in court. For example, what kind of fool would pour good money into a shop whose products poisoned hundreds of customers and killed three children, and then blamed much of the fiasco on its suppliers?

The answer: A fool who wanted to get rich. The company in question was Foodmaker, owner of the Jack in the Box fast-food chain, which sold hamburgers that contained deadly levels of the E. coli bacteria. When the news broke in early 1993, shocked investors dumped the stock, and its price eventually fell 65 percent. What the market overlooked, however, was that Foodmaker, which changed its corporate name to Jack in the Box in 1999, not only had a lot of customer loyalty but also heeded the experts it hired to reform its sanitation procedures. From its low point in the depths of the scare, the stock grew almost sevenfold during the next seven years.

Jack in the Box is worth remembering as you scan today's scandal-racked business headlines. Invest in Martha Stewart Living Omnimedia, Tyco International, or Citigroup? The natural impulse is to avoid such stocks the way you would a presidential palace in Baghdad. But it's in such universally loathed securities that you frequently find the best chance for impressive gains. "Not many investors can see past the headlines," says veteran money manager Don Yacktman of the Yacktman Fund, which during each of the past three years has topped the S&P 500 by 30 percentage points. "As a result, some perfectly good businesses are selling for really low prices."

The operative phrase here is "perfectly good businesses." If the scandal undermines a company's business model or reveals that it was never much more than a house of cards (Enron being Exhibit A), there isn't much of an investment opportunity. But market psychologists say investors are prone to the all-too-human tendency to generalize from scant information--in this case, the headlines about an ethical imbroglio--and conclude they know all they need to know to evaluate a company's potential. "People tend to overestimate the value of their information about a company, even when that information is very limited," says J. Edward Russo, a Cornell University professor of marketing and behavioral science.

Let's start, for example, with Citigroup, which is in hot water with just about everyone. The Federal Trade Commission is questioning the firm's lending practices, Congress wants to know if it helped Enron hide debt, and New York attorney general Eliot Spitzer claims that it issued bogus stock recommendations to woo investment banking clients. Result: The blue-chip stock is down more than 27 percent since the beginning of 2002.

And business is ... great. Citigroup combines the country's biggest consumer bank (Citibank), the No. 2 brokerage (Salomon Smith Barney), and one of the leading insurance companies (Travelers). All told, the firm has operations in more than 100 countries. This diversity has helped Citigroup ride out downturns in individual sectors and nations. In fact, its profits rose 8 percent in 2002, despite its taking $1.3 billion in charges to cover its share of a proposed settlement with Spitzer (plus related legal costs). Merrill Lynch analyst Judah Kraushaar figures Citigroup shares, now at about $35, could hit $61 within 12 months. With a 2 percent dividend yield, the return would be more than 75 percent.

Meanwhile, Tyco's stock has taken a 70 percent beating since 2001, due largely to the money-grubbing behavior of former CEO Dennis Kozlowski. While his arrest on tax-evasion charges has roiled the company's leadership and destroyed Wall Street's confidence in its numbers, the fear may be overblown. Celebrity corporate lawyer David Boies has overseen an internal review of Tyco's accounting and said he found no material fraud or accounting errors. Besides, Yacktman notes, most of the conglomerate's operations have public track records that date back to before Tyco purchased them. "You don't have to rely on Tyco's numbers to get a sense of how those operations can perform," he says. UBS Warburg analyst David Bleustein estimates that Tyco's operations are worth some $24 a share--a 45 percent premium to its mid-January share price.

Nasty headlines about Martha Stewart's suspected insider trading are the biggest reason her company's shares have plunged 54 percent since last March. But the fact is that many of Stewart's fans are still crazy about her. (If you don't believe it, log on to www. savemartha. com.) Such loyalty helps explain 11 percent advertising gains last year for the firm's flagship magazine, Martha Stewart Living. "Even with all the problems surrounding Martha Stewart, her magazine performed better than its industry last year," says Kathleen Heaney, consumer analyst at investment and merchant banking firm Brean Murray.

Stewart's strong fan base also lies behind the ongoing success of her product lines in housewares (with Kmart), paint (with Sherwin-Williams), and floor coverings (with Shaw Industries). Indeed, sales of Martha-licensed merchandise rose 21 percent during the third quarter of 2002.

While the company did see its profits fall by an estimated 30 percent in 2002, the decline can in part be attributed to the fact that it was investing heavily in its Internet and catalog businesses, as well as launching a new magazine, Everyday Food. Heaney says those investments could set the company up for better results this year.

Obviously there's still plenty of risk in these stocks, and instinct says--screams, even--to dismiss them as a bad bet. The only problem is that instinct has a long history of steering investors wrong. Will any of these scandal-marred stocks go on to be the next Jack in the Box? Who knows. But the real scandal would be to write them off without a look. --CLINT WILLIS