It's So Much Better Than You Think

Gas is $4 a gallon! And home prices are down! And inflation is up, too!

In the words of Arnold in Kindergarten Cop -- stop whining!

You lack discipline
See, back in March, my esteemed colleague Richard Gibbons argued that "It's So Much Worse Than You Think," pointing to falling home equity, the credit crisis, and poor consumer-confidence figures as signs of economic trouble ahead. His advice was to refocus our investments on undervalued companies.

It's great advice, don't get me wrong. But the current economy might be better than we think.

Cranky consumers
What makes the current economic outlook so dreary is that it's mainly consumer-driven. Combine the fact that consumer confidence measures are near generational lows with the reality that two-thirds of our economy is based on consumer spending, and you have a recipe for a bad economy. Add embellished media coverage, and it only gets worse.

But is it reasonable? According to a recent article in The Washington Post, "The last time consumers were this miserable, in May 1980, the jobless rate was 7.5 percent and inflation was 14.4 percent. Now those numbers are 5.5 percent and 4.2 percent, respectively."

It's all relative, of course. We haven't seen 5% inflation since 1991, so it's understandable if that 4.2% figure freaks you out a bit.

And then there's gas, which is up nearly 200% in five years. What's worse, we're reminded of this each time we pull up to the pump. Hey, I don't like paying $4.23 for gas either, but consider that on an inflation-adjusted basis, gas cost $3.50 a gallon ... in 1918. That doesn't make it any less painful, but the historical perspective counters the claim that this jump is extraordinary.

The economic situation is undoubtedly not as rosy as it has been over the past five years or so -- but it's also not as bad as we might think it is.

The art of staying in a hot kitchen
So does this mean Gibbons' advice is bunk? Not so fast.

Whether the economy is horrible or only so-so, it's important to stay invested in stocks. A report from Tweedy Browne notes that "Empirical research has shown that 80%-90% of investment returns have occurred in spurts that amount to 2%-7% of the total length of time of the holding period. The rest of the time, stocks' returns have been small. With stocks, you have to be in to win."

In other words, if you miss out on those big market days (and they can happen any time), your returns will suffer. But that doesn't mean you should buy just anything. It's always important to have a portfolio of good companies purchased at a good price.

One way to find good companies trading at a discount is to follow a strategy used by Ron Muhlenkamp, which is to look for stocks that have a return on equity greater than the price-to-earnings ratio.

I ran a screen for those criteria, and more than 700 companies came up. Here are a few you could research further:

Company

Trailing P/E

Return on Equity (ttm)

Transocean (NYSE: RIG  )

16.1

36.5%

NVIDIA (Nasdaq: NVDA  )

14.2

34.9%

Noble (NYSE: NE  )

12.8

33.3%

Manitowoc (NYSE: MTW  )

12.9

31.8%

Corning (NYSE: GLW  )

14.2

31%

Raytheon (NYSE: RTN  )

14.4

14.8%

Southern Copper (NYSE: PCU  )

14.4

57.9%

*Source: Capital IQ, a division of Standard & Poor's, as of June 20, 2008.

Put the babies to bed
Great buying opportunities can be found in any type of economy, including this one. If you're looking for help in your search for today's compelling buys, our Motley Fool Stock Advisor service has maintained the same investing philosophy since its inception in 2002. Look for companies that are:

  1. Reasonably priced.
  2. Well-managed.
  3. Poised to grow.

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Todd Wenning was the Sausage King of Chicago before that Abe Froman character showed up on the scene. He does not own shares of any company mentioned. NVIDIA is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy is a righteous dude.


Read/Post Comments (10) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2008, at 6:57 PM, ecoloney wrote:

    The price of gasoline has nearly doubled since the Democrats took control of both Houses of Congress but then they always promise "change" (but not necessarily for the good of the poeple).

  • Report this Comment On June 27, 2008, at 8:02 PM, dkscheier wrote:

    If the cost of 1918 gas is inflation adjusted then why don't you just inflation adjust our total earnings so that we can afford to pay for it along with the food that has also substantially increased, and everything else which has increased as a direct result of the higher fuel cost.

    It is going to come down to protecting our environment all right, but it will be at the expense of our economy if we do it, or, could this be the ultimate plan for those in the O'bama camp after the Liberman energy bill and the Global Poverty initiative?

    Who knows? We had better start drilling in the Atlantic and open up ANWR. Every other nation is doing it. China is drilling off of Florida and Korea is off of Alaska. Since they don't have to buy it from us, why should we buy it from others to get it back? I would sure like to get a bit less environmental since we now have the protective technology and a bit more economical. If you want to rationalize it with inflation adjusted dollars, then show me your inflation adjusted 5 cent cigar.

  • Report this Comment On June 28, 2008, at 1:31 AM, flyyoufools wrote:

    First: Though I'm a staunch independent and no Democratic fanboy, the democrats taking both houses does not give them control over demand for oil in China, does not grant them a magic wand to reverse the decline of the dollar, and sure doesn't give them the influence over OPEC to pump more supply into the system.

    Second, anyone who thinks the answer to $4 gas is more US domestic production is an idiot, a sheep, or holding stock in a domestic driller. The US has about 1% of the world's oil reserves. If we DOUBLE domestic production, you wouldn't notice the price difference. Why? Because we can't put enough supply into the market to significantly affect the price - it's a world market, not a local one. So unless we go all commie pinko and nationalize the domestic oil production and sell it to US consumers at a loss, oil companies will be legally bound to their stockholders to sell oil at the market price, which will still equate to $4/gallon. Domestic oil drillers will make more "windfall profits", but it won't help you noticeably.

    Get the Saudis (who CAN influence price) to pump a little more at the same time we make real steps to stem the long-term growth in oil consumption -- those are the only seriously viable options left.

  • Report this Comment On June 28, 2008, at 10:49 AM, Martini69 wrote:

    Yeah, let's leave it in the ground until we are all riding bicycles. The same strategy the left has forced on us for the last ten years. Wake up people these economic hardships are here to stay and it is time we get a new energy policy that works for the future of all of us. That should include drilling anywhere possible while working on new technologies to create serious energy solutions to carry us into the new millennium.

  • Report this Comment On June 28, 2008, at 3:41 PM, Bigginmon wrote:

    Interesting. I wonder what the unemployment and inflation numbers would be if they were measured in the same way we measured them in 1980.

  • Report this Comment On June 28, 2008, at 5:56 PM, willm49 wrote:

    We've all enjoyed decades of cheap energy and ignored the fact that it cannot last forever - until now. While we should have been thinking long term and panning for a future with much less dependence on oil, no US government of either flavor and certainly not most of "we the people" seem to be able to think any further than the next presidential election. The chickens are now coming home to roost. Anyone who thinks we can drill our way out of this self created mess, either domestically or globally, is in cuckoo land. What it will take is a major shift in the way we do things starting with conservation and if it takes 4, 5, 6+ dollar gas to do that - so be it.

  • Report this Comment On June 29, 2008, at 3:24 AM, achilles992000 wrote:

    the airline industry will have a tough time with oil at $140. now you have to pay $15 each way to check your bag in and if you want a soda on the plane that's another $1-$2. who knows when airlines will start charging for carry on luggage? i don't think the airlines can survive for long with oil this high.

    GM, the airlines, and component makers are going to sink. one has to assume that unemployment is on the way up.

    we haven't even begun talking about nat gas prices, housing, rising food cost sor the credit crisis yet.

  • Report this Comment On June 30, 2008, at 4:09 AM, MyGoals627 wrote:

    Kudos to flyyoufools and willm49. Anyone blaming this on Dems or 'pubs is ignorant of reality and a blame artist. Those that control oil realize in the present world of global warming, hybrids, and an independent Brazil that the proverbial writing in on the actual oil rig.

    The world creates more gas efficient vehicles, which means less oil is used, which means...yep, they have to raise the price of oil to make up the difference.

    All present day experts admit that if you started drilling anywhere in this country today - whether off Florida, California or in ANWAR, we wouldn't see drop one of oil for 10 years. The experts also say that most geologic studies of ANWAR show that after 10 years of building wells and pipelines at a future-based cost of what - $500billion!? we should end up with a whopping 6 months worth of oil. How sane and Godly of humanity to just keep destroying with no means of putting back.

    I agree - let the price keep rising, and you'll see ingenuity not seen since our parents generation during and post-WWII. The hybrids of today will pale to what will exist in 10 years.

    Victor Hugo said in 1852 "Necessity is the Mother of All Invention". That quote was altered a bit by Thorstein Veblen, a US economist and social philosopher to "Invention is the Mother of Necessity". Two very wise and progressive thinkers whose words are so very timely.

  • Report this Comment On July 03, 2008, at 5:31 PM, needsadime wrote:

    Todd, I'm taking issue with your statement:

    "...consider that on an inflation-adjusted basis, gas cost $3.50 a gallon ... in 1918. That doesn't make it any less painful, but the historical perspective counters the claim that this jump is extraordinary."

    Check out this chart: http://tinyurl.com/yn2yj6

    The clear trend in this graph shows how energy has gotten cheaper (excepting a couple of spikes that corrected within a couple of years) over the last century. It also shows that this recent jump is in fact unprecedented. And if the recent supply/demand trends for oil continue over the next few years, it's clear that the days of cheap energy are over.

    Energy drives our economy, and the cheaper it is, the higher the economic output. We may very well be in for a new era.

    This is not a doom-and-gloom forecast - but I think it's hard to argue the contrary case. Of course, I'm open to other insights...

    PS. Let's stop blaming the politicians for a market problem!

  • Report this Comment On July 04, 2008, at 2:35 AM, codeculturist wrote:

    "The price of gasoline has nearly doubled since the Democrats took control of both Houses of Congress"

    You, sir, have earned yourself a wikipedia.

    Since you're posting this on a Foolish board, I'm going to assume you're here to learn. Let me introduce you to post hoc ergo prompter hoc that you may make stronger arguments in the future so we can learn something from you:

    http://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc

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