Ugly Markets, Bountiful Opportunities

To say it's been a tough year for investors is like saying Tom Brady's season-ending knee injury was a minor blow to the New England Patriots' season.

You probably won't be surprised to hear that the S&P 500 is 34% off its high, but you might be shocked to hear that 159 companies in the S&P 500 are 50% or more off their 52-week highs. That's some serious pain -- and not all of the companies are financials or in the recently battered energy complex, either. Whole Foods Market (Nasdaq: WFMI  ) , NVIDIA (Nasdaq: NVDA  ) , and other consumer names have been beaten up, too.

The flight from global markets
It's been tough here at home, but it's been worse just about everywhere else -- and the past few days are only continuing that trend. The MSCI EAFE Index, which tracks foreign large-cap companies, is off 42%. This sampling of some major market indexes from around the globe gives an even better sense of the declines:

Country (Index/Market)

Decline From 52-Week High

England (FTSE 100)

32%

Germany (Dax)

34%

Japan (Nikkei 225)

40%

Brazil (Bovespa)

43%

China (Shanghai Comp)

65%

Source: Yahoo! Finance.

Outside of consumer staples, there's been nowhere to hide in this decline. Even the supposedly stronger sectors are now weakening -- as anybody who was heavily invested in commodities or infrastructure has learned over the past two months.

But if you step back and look at the big picture, you'll see there really aren't any surprises here. Less-mature, high-growth markets are experiencing more volatility than developed markets are.

Why I'm getting that greedy feeling
I'm not a market timer. I don't know how low the bottom will be or when we'll see it. But I'm not going to lie and suggest that Warren Buffett and other legendary investors got wealthy buying near the top.

No, they made the bulk of their investing fortunes by buying high-quality businesses during bear markets and times of panic. In other words, they made their money because they invested during environments just like the one we're wrestling with now.

All bear markets eventually end -- even if they seem interminable and brutal as they're happening. That doesn't mean it's easy to buy in these times. But with cash generators such as Fortune Brands (NYSE: FO  ) 35% or more off their highs and yielding 3.4%, I'd rather be a cautious and gradual buyer than a seller.

And I'm looking overseas
Yes, overseas. And no, I haven't lost my mind.

The late Sir John Templeton advised us to "see the investment world as an ocean and buy where you get the most value for your money." Even though the epicenter of the current crisis is the United States, many foreign markets have experienced steeper declines than ours has. That means there are some terrific values in international markets right now.

Some U.S. companies will position themselves well and do fine. But many international markets -- such as Brazil -- aren't facing the same economic headwinds, haven't been running deficits, and have been consistently investing in infrastructure -- all of which means they're likely to continue growing.

Their volatility this year just makes it easier to find value.

Start with the creme de la creme
Regardless of where you're looking, you should seek out companies with some or all of the following:

  • An insurmountable market share.
  • Unique assets.
  • Talented management.
  • Brands that can't be replaced.

Companies with those characteristics, mixed in with a strong balance sheet, will be the most likely to capitalize on any further deterioration in the markets.

For example, look at America Movil (NYSE: AMX  ) . It has 70% of the market share for mobile service in Mexico, as well as growth opportunities throughout Latin America. Here are three others you might consider, all of which are well off their highs:

Company

Decline From 52-Week High

Country

Mexican Economic Development (NYSE: FMX  )

34%

Mexico

Diageo (NYSE: DEO  )

35%

U.K. (Global)

Banco Itau (NYSE: ITU  )

53%

Brazil

Foolish final thoughts
We haven't yet seen a stock market decline like the one in 1973-74, but we're in the most stressed financial environment since the Great Depression. That sounds terrifying, but distressed markets are the ones that put businesses on sale -- and I know of no better way to make money than by buying excellent companies on the cheap.

Our Motley Fool Global Gains team is scouring the globe to find the best bargains in the investment world. If you'd like to see what we're recommending now -- as well as our best bets for new money now, take a 30-day free trial. You'll get access to our community of like-minded international investors, as well as research reports from our trips to China, Southeast Asia, Brazil, and Argentina. Just click here to get started -- there's no obligation to subscribe.

Nathan Parmelee is a Global Gains analyst. America Movil is a Global Gains selection. Diageo is an Income Investor choice. Whole Foods and NVIDIA are Stock Advisor recommendations. Nate doesn't own any of the companies mentioned in this article, but he's considering it as soon as our disclosure policy allows it.


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