The Opportunity of a Lifetime

We Fools take a lot of flak for our relentless optimism. So even though I've been claiming that this is a fantastic time to be buying stocks, I won't fault you for ignoring my advice.

But ignore Marty Whitman at your own peril.

Marty who?
Whitman is the notoriously curmudgeonly manager of the Third Avenue Value fund. A value investor through and through, he prefers to buy companies only when they are trading at a significant discount to intrinsic value -- the man's motto is "safe and cheap." Since its inception in 1990, Third Avenue Value has posted an annualized return of 13.2% -- a mark that surpasses the S&P 500 by a wide margin.

So while it may not matter much that I think stocks are on sale, you would be wise to heed Whitman -- and he says that today's prices represent "the opportunity of a lifetime."

To put that statement in proper context, consider that Whitman's lifetime began 83 years ago. He's lived through the Great Depression, a World War, bull markets, bear markets, bubbles of all shapes and sizes, stagflation, and everything else on the Contemporary American History 101 syllabus. He's made a fortune for himself and his investors. And today's market is the best opportunity he's ever seen.

He's not alone
Whitman believes that at today's prices, "the most important securities are being given away." That statement echoes the sentiment of Warren Buffett, who recently wrote an editorial in The New York Times explaining why he is happily buying equities in his personal investment account.

"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," Buffett wrote. "These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now."

This isn't merely lip service. Both Whitman and Buffett have been criticized in the past for maintaining an excessively conservative cash balance. But today, both value gurus are putting their money where their mouths are and buying stocks.

Why are stocks so cheap?
It's important to analyze the recent selling wave to determine why investors are willing to sell shares at such lowball prices -- because it won't always be this way.

As I mentioned in a recent article, many mutual fund and hedge fund managers need to raise cash in a hurry to meet margin calls and/or redeem their investors. In many cases, this means those fund managers are forced to sell shares regardless of the company's fundamentals or future prospects.

Not only that, but these fund managers also don't have the cash to buy stocks at today's prices (remember, margin calls and redemptions) -- even if they wholeheartedly agree with Buffett and Whitman.

And that means the stocks of many great companies are trading on the cheap.

Which stocks should I buy?
But remember, Buffett and Whitman aren't licking their chops at the prospect of buying just any stock. They're looking for easy-to-understand businesses with strong balance sheets, sustainable competitive advantages, shareholder-friendly management, and a stock price far below their estimate of intrinsic value. And in this environment, those opportunities are abundant.

Take a look at the following seven stocks, each of which I believe meets the aforementioned criteria:

Company

5-Year Average P/E Ratio

Current P/E Ratio

Apple (Nasdaq: AAPL  )

79.0

20.0

Bristol-Myers Squibb (NYSE: BMY  )

20.2

10.7

Charles Schwab (Nasdaq: SCHW  )

30.6

17.9

Microsoft (Nasdaq: MSFT  )

27.7

11.8

Nike (NYSE: NKE  )

21.5

15.6

Oracle (Nasdaq: ORCL  )

27.2

16.4

Starbucks (Nasdaq: SBUX  )

47.5

20.7

Admittedly, the P/E ratio is a rough approximation of value, but this chart illustrates just how cheaply these companies are selling for.

Don't wait for the robins
I know some of you are waiting for signs of an economic recovery before buying -- but don't hold your breath. Yes, those seven companies will likely have further "earnings hiccups" ahead, and there is a good possibility that their stock prices could slide further south.

But as Buffett astutely noted in his editorial, the stock market has a habit of recovering well in advance of key economic indicators. This was true of the Great Depression, the World War II swoon, and the recessions of the early 1980s and 1990s. As Buffett quipped, "If you wait for the robins, spring will be over."

In other words: Buy now.

If you'd like to see what other companies would be worth your time and research, a free 30-day trial to Motley Fool Stock Advisor will show you what Fool co-founders David and Tom Gardner are recommending today. Click here for more information -- there's no obligation to subscribe.

Rich Greifner expects to see a lot of robins when spring arrives. Rich and The Motley Fool both own shares of Starbucks. Apple, Charles Schwab, and Starbucks are Motley Fool Stock Advisor recommendations. Microsoft and Starbucks are Inside Value selections. Third Avenue Value Fund is a Champion Funds choice. The Motley Fool has a disclosure policy.


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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 November 02, 2008, at 8:16 PM, SteveTheInvestor wrote:

    I think that perhaps we need to acknowledge that while some of these stocks may be somewhat discounted, your comparison of P/E's is a bit slanted. The five year period you refer to is the same period in which the US markets and perhaps much of the world's markets were built up on false wealth and wild speculation. Apple, with a P/E of 79 is flatly absurd, as are some of the others.

    There is no reason to believe that the economy will roar back at any time within the next 5 to 10 years. I expect it will likely limp for some time (after it finishes crashing that is). Rather than being cheap, some of these stocks are more likely just hitting a reasonable valuation.

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