Skip to comments.One Outrageously Cheap Stock
Posted on 03/09/2008 6:01:33 PM PDT by BenLurkin
You know that political bumper sticker that reads, "If you're not outraged, you're not paying attention"? It might as well apply to the market these days. Starting in November, stocks started dropping ... and they haven't recovered.
Good -- even great -- companies are being sold down to levels far below their true worth, and investors are losing their savings. It's outrageous!
A shocking and somewhat interesting statistic A whopping 79% of all stocks traded in the U.S. are down over the past four months. That's 5,339 names in the red. Another 3,032 of those names (fully 45%) are down 15% or more. And stocks such as Intel (Nasdaq: INTC), Verizon (NYSE: VZ), DISH Network (Nasdaq: DISH), and even Wrigley (NYSE: WWY) haven't returned a penny for the past three years.
So if you've lost money of late, don't feel bad. There has been no hiding from this downturn.
But let's also be honest: It hurts.
Time to panic sell It's outrageous and it hurts, but what's the individual investor to do? The market is a monolith at times, and it can be hard to sway.
Case in point: Barrett Business Services. I found this tiny West Coast professional employer organization and staffing company during my work as the micro-cap analyst for our Motley Fool Hidden Gems service. At the time, it was trading for a little more than $20 per share. I liked the CEO, I liked the balance sheet, I liked the track record, and I thought it looked cheap.
What's happened since? You guessed right: It's dropped about 25%.
What's your next move? See, the market has it in its head that the economy is worsening and the consumer is weakening. When fears are that broad, everybody gets punished.
Pain isn't reserved for companies that struggle to turn a profit, such as Wind River Systems (Nasdaq: WIND). Companies such as Fannie Mae (NYSE: FNM) that have seen their business fundamentally altered by the credit crunch are also hurting. The market has even stung "defensive" plays like Clorox (NYSE: CLX).
And while losing money can feel outrageous, the most outrageous part about all of this is that even great companies are getting caught up in the chaos. Some of this makes sense (the economy is getting worse, after all), but some of it does not (it won't be terrible forever).
But back to Barrett: It still has a strong balance sheet, it's buying back shares and buying up weakened competitors on the cheap, and it's paying shareholders a nice 2% dividend. Could the stock drop further from here? Of course, but I still think it's outrageously cheap.
And I'm not alone. CEO Bill Sherertz told analysts on the last conference call: "If you guys want to sell [the company] down to five times earnings, maybe I will just buy the whole [expletive] thing."
Enough [expletive] said After backing out cash on the balance sheet, Barrett today sells for just 7.0 times earnings. But that's not necessarily the point. It's suffering along with a few thousand more stocks on the market.
Investors, then, have two ways to express their outrage:
Withdraw money from the market and wait for current market conditions to subside. Put more money in the market and take advantage of current prices to build a portfolio of excellent companies on the cheap. We're all about the latter strategy at Hidden Gems, and we're excited because there are so many more buying opportunities today than there were last summer, when our returns were flying high. Fortunately, investing isn't about short-term returns; it's about making a fortune over the next decade or more.
While market conditions like those we have now can be painful, they're can also help you amass a fortune. So swallow hard, and start buying
Therefore, without asking anything unfitting of you . . .
what’s a reasonable thing to do with limited capacity to do?
If you have cash, and need more stocks, it is an excellent buying opportunity. The market is pessimistic, and is factoring in the recession that has barely begun. As soon as the trough is through, stocks will rebound sharply, probably up 5% on a few different days. You just have to be IN the market befor that happens.
Unless Bernanke and a Dem president bake us some stagflation. Then we're all scr*wed.
I've been thinking about nailing those twins for at least 45 years.
And that Judy Jetson chick too.
“So swallow hard, and start buying”
I have stock that has dropped 8% while increasing production and selling out on its’ product.
You're too late, homey. Been there, did that.
I like T-bills. Why take any more hits on YOUR money? Down 20-30%? Try 50-60...
Re-buy lower. Never chase a downward market. Love these folks that think it is some kind of sports game. BUY MORE! yea right! Is Jim Cramer your mentor? HA!.
1-3% upside beats 20-30% downside any day. T-Bills folks.
Book mark this one with all my correct posts on the market in the past 3 years. Like selling Google and buying puts when it was 700$ No one like that one either.
I'm thinking of selling it tomorrow and move the money into something safe like "Wal Mart".
bump and buy, I guess.....
1-3% in T bills? Can’t I get CDs that pay more?
I think you said that a few days ago, Monday is around the corner.
The next upside in the market is going to be in 5-10 years. You will have plenty of time to get back in.
The best deal ever was Corning (GLW) at $1.00 back in late ‘02. Fell from $105 in late ‘00 to $1.00 in just two years. 150 year old company, not some fly-by-night tech stock. Been stable now in the mid-20s for a while.
Too early to Buy in right now. All of the bad news will continue until May when the tax rebate checks get mailed.
By mid-May, we’ll be at the Bottom. By November, lust and greed will have reared their heads above Fear, and we’ll be back to the Long Boom.
T-bills are the last line of defense. This market has not even started to unwind. All the REAL bad news has not been revealed.
The rear view mirror is always clear and the windshield covered in fog.
God speed to those who still think that holding is prudent.
Tomorrow, around 11 "we're" making a decision.
I don't hear anyone telling me NOT to sell it, LOL!
Never chase a stock (either up or down) — excellent advice!
One can never call either the bottom or the top but it IS possible to buy low (by buying into this kind of market) and sell high for those with investing time frames of five more more years or so.
Won’t take 5-10 years. S&P is trading at about 11-12x 2009 earnings estimates (15x this year’s earnings). At that point, it’s grossly undervalued compared to the last 50 years. Even the dotcom bubble didn’t take 5-10 years to turn around.
I own a few hundred shares of C at ~28 ... But I’m not margined so I will just sell covered calls on it and wait it out
BUY! BUY! That’s Double Mint gum, not Triple Mint.
>> Never chase a downward market.
I can show you the scars on my hands where I tried to catch the falling knives in ‘00 - ‘01.
I’ve learned my lesson.
Ain’t nowhere near the blood in the streets that there will be, soon.
Real estate, too.
It’s a good time to be in cash. I hope the goofballs at the fed don’t inflate it all away.
Depends on what I paid for it ...
Then you will have the problem of reinvesting. I used to think Money Markets were safe but they can break the buck.
Get every dollar of possible liquidity out of the stock market; out of banking institutions; out of mutual funds; put it all in short term T-Bills—through Treasury Direct if possible; if not in a fund such as American Century Investment’s Capital Preservation Fund.
Start tomorrow morning at 7:00 CST by calling American Century to open an account.
Carlyle Capital hit the wall last Thursday. As one of the biggest players Carlyle was investing because they could make a good deal of money between what debt instruments were paying and the cost of borrowed funds.
Not to be outdone by anyone else they borrowed big time such that their leverage was 1:32. Yup, that is right! When these mortgages began to lose more than 3% of their principal, Carlyle had to sell and sell big.
No doubt, there are many other large players that have been caught using massive borrowings to make their money; however, these borrowings become cash starved alligators when things don’t work out.
I note, that solvent corporate borrowers can still borrow. After all, Gates plans to borrow half of 40 billion to buy Yahoo. Interest rates are still low and many fine companies continue to make money.
I probably am stupid, but I am betting we are close to a sharp decline and then a massive thrust to the upside. Big profitable companies should make money for themselves and their investors.
My CTRL + V got stuck. Sorry. :)
The spread from T-Bills to CD’s is not enough to justify the additional risk in the CD’s.
One point, (I have many)
When has the US Federal Government sends checks to the population to have a short term spending increased? Which won't be a spending increase but end up back into the financial sector. (Credit, loans, etc. It is a bailout. Think about the facts for a minute. Washington gives out money to families, they pay bills, where is most of this money going to end up?
That is a sign of how bad this really is. You can dismiss all that I have posted. And you will forget that you read it. But I do not think this is a time to hold onto equities, Keep the historical pricing, it won't help you make a dime. If were only that easy.
For me, it's losing every dime if Citi goes under. The FDIC won't reimburse their investors.
I'm waiting for someone to tell me Citigroup won't collapse..that I'm being foolish thinking this.
You are convinced this is a sound org and strategy because???
Thanks much for your kind reply.
My stocks are like that. They just posted very good earnings, are not subject to any of the current credit turmoil, yet have been going down with the rest of the market in Jan and now. It isn't anything to do with them, it is probably only the general market sentiment and margin call covering.
Now is always the time to buy, if you know what you are doing. If you don't know exactly what to do now, just have some money ready and study. I follow about 30-40 stocks. I study a few of those seriously. Of those I invest in about 2-5 of them, and when my money is invested I follow them very closely. I know their histories, and I know pretty well where they are going. If you know the companies, you know what is a problem, and what is an opportunity caused by the derteriorating market.
Also, I have not invested, but I am starting to get more interested in bonds. Those wild interest rates are good if I can lock some of those in.
No. Not so.
If you believe that, pick an S & P company; order up the current SEC financial filing; get a copy of the current financial report; take a pencil and paper and restate the earnings to GAAP--take amounts reported as gross income that have not been earned out of income; take below the line items that are not treated as expenses above the line as costs of earning the current income; restate compensation expense to reality by treating equity compensation as compensation; by treating true retirement plan costs as current expenses; by treating long term health care costs accruing in the current period as expenses. Read all the footnotes and restate the reported earnings to reality by historical GAAP.
You will find in most cases that the earnings have disappeared--that true P/E ratios are still above 50.
Thanks much for your kind reply.
The dotcom was far worse. Dow/S&P stocks were 2-3x overvalued based on historical averages and the Nasdaq was nearly 10x overvalued. I see all 3 indexes significantly higher at the end of 2009. If it does drop from now till then, I’ll just keep plowing money in. Don’t buy this hysteria. Over 1000 S&L went belly up in the S&L crises. We’ve only had 2 small ones this year and a handful last year. The world is not coming to an end. I expect the bad news to end by November at the latest.
I don’t think that Citi is going under ... but what do I know ... Someone may buy them ... but if they were to go under the aftermath would be market wide
The PE Ratio of the S&P 500 is 19-20x right now based on the entire 500 even with bills and billions in paper write downs in Q3 & Q4. There are a few companies with higher sure but overall it’s around 19-20 and estimated 15 for this year.
I’m doing low 8 figures commercial refinancing plans right now on long term holdings
nice timing for me
the difference in debt servicing is more than I live on annually
.....I’m waiting for someone to tell me Citigroup won’t collapse......
Citigroup won’t collapse
2% dividend is nice... until the current dividend tax rate gets raised from 15% up to the possible 39.6%. And the capital gain potential looks nice at a 7-PE, but what happens when the capial gains tax rate gets adjusted back to its old levels? Maybe part of the market's pessimism is tied to the doom & gloom predictions and policy "fixes" being propsed by a certain major political party...
I listen to Cramer sometimes, and he put me onto an oil trust. Now, it’s got about a 7 year life, but it puts ALL its profits back as dividends, has a positive growth in stock value, low P/E. Also got into a Fidelity natural gas fund (wide range of oil and gas related stocks). Down slightly the first quarter, but has a growth rate of 25% per year....year after year after year.
Finally, look at money funds. Not CDs but actual funds that invest in currency spreads.
Energy and money. Cant go too wrong.
What about land Ben? I have a building lot I bought almost 20 years ago. I won’t be able to retire on it as planned. Should I have sold it already or is now as good a time as any?
Uh, if you would please take a look at the SP500, COMPX and QQQ’s, you’ll see that this past autumn was the closest that the markets have come to recovering to March, 2000 levels. That’s seven years.
And now that level is gone, likely to not be seen for at least a couple more years after where the market will be going this year.
What people are overlooking is that despite the government propaganda, we have inflation. In a very low inflation environment, the PE’s of around 15 are fair valuation (long term) for the SP500.
Now, in an inflation environment, subtract the rate of inflation from the 15 PE and you get what “fair” valuation in that inflation environment is. If you believe the government propaganda, we’re closing in on 4% inflation. Let’s believe them for a moment. 15 - 4 = 11, which means that the SP500 is now fairly valued for 2009 expected earnings. If inflation goes up, the valuations will have to come in. If earnings miss, the valuations will have to come down.
There’s not a whole lot of upside in this market just now.