The Mistake Everyone's Making Now

Bleak news blankets the market, giving investors every right to worry. Europe remains mired in a debt crisis, China's economy is slowing, and the BP Deepwater Horizon spill won't leave the headlines.

In the face of all this bad news, it's tempting to sell shares and wait for better times. When your portfolio falls by 10% over a three-month period, a Treasury note's safe 3.1% annual return starts to look pretty good.

But that can be a huge mistake.

The safest way to lose money
While Treasury notes may ensure that you don't lose money in the short term, they can also guarantee that you won't have enough money for retirement. In fact, it's likely that in real terms, you'll actually lose money in T-notes.

Recently, T-notes have been paying about 3.1%. From this, you have to subtract taxes, which lowers your return -- and that's not all. Over the last decade, inflation has averaged somewhere around 2%, eroding the value of both your principal and interest. In light of both these factors, T-note investments are clearly a time bomb that will cost you purchasing power.

Lower-risk investing
Thankfully, one approach can both reduce risk and achieve huge profits in the stock market. Best of all, it's most effective in the sort of choppy market we have now.

The secret strategy? Buy stocks for much less than they're worth.

The reasoning is simple. If you pay $30 for a stock that's worth $50, it's much more likely that the stock will jump to $50 than fall to $20. You've reduced your downside risk, but at the same time, you still have a huge upside, because you can be confident that the stock will eventually return to its fair value.

Right now is the ideal time to look for bargains. Just look at how cheap some of these stocks are:

Company

5-Year Average P/E

Current P/E

CAPS Rating

Target (NYSE: TGT  )

17.0

14.2

***

Silgan Holdings (Nasdaq: SLGN  )

15.4

14.4

*****

Apollo Group (Nasdaq: APOL  )

22.8

11.3

**

H&R Block (NYSE: HRB  )

15.3

10.0

*

Tetra Tech (Nasdaq: TTEK  )

32.0

14.3

*****

Best Buy (NYSE: BBY  )

17.1

11.5

***

The ugly
Admittedly, some of these stocks are cheap for a reason. Both Apollo and H&R Block get low marks from CAPS, the Motley Fool's 165,000-member-strong investing community.

For a deep dive look at Apollo Group, check out this blog post from CAPS All-Star Wax, who estimates the current price as the high end for a reasonable estimate of value.

H&R Block has also been hurting for the past few years, burdened by missteps in the subprime market, accounting errors, and the growing market share of rival Intuit's (Nasdaq: INTU  ) TurboTax. To top it off, last week the company's CEO left to run a private company. In my opinion, investors should also stay away.

The mediocre
Our investing community is neutral on Target and Best Buy, which both face challenges from the sluggish economy. Recent channel checks of retailers' electronics departments by Jeffries & Co. do not bode well for Best Buy in particular. Overall, consumers' heavy debt load and lack of savings will hurt retailers in the longterm.

The great
Our CAPS community is most excited by the last two stocks above, for good reasons.

Silgan Holdings is the dominant consumer-packaging company, making soup cans and squeeze bottles for an assortment of blue-chip customers. Silgan is the low-cost producer in its industry, recession-resistant and packed with pricing power. The company's management has a large stake in the business, stays focused on return on equity and free cash flow, and has kept its share count relatively unchanged for the past 20 years. (Total share count has actually fallen 1%.)

Tetra Tech has suffered from poor short-term earnings and guidance because of slow stimulus spending. But once stimulus spending ramps up later this year and into 2011, the stock should take off. As CAPS All-Star Jackcodak explained last December:

I have been watching this company for a while now. They have been making a lot of acquisitions in the Western U.S. and most of these firms have a long standing business relationship with local governments. I am not sure how much stimulus money this company will receive, but when it comes to water engineering these guys are the "only game in town." Hopefully, the USAID contracts and Base Realignment and Closure Contracts (Naval) will keep these guys standing until local dollars pick up. The future of the Western U.S. is water and Tetra Tech is a wonderful specialist company.

The Foolish bottom line
In a market like this, you should be particularly active in identifying undervalued opportunities. Do you think this a good time to buy into companies like Silgan and Tetra Tech, or do other companies catch your eye? Let us know in the comments box below!

Dan Dzombak recently posted two of the top 20 articles he's ever read. He does not have a position in any of the stocks mentioned in this article. Apollo Group and Best Buy are Motley Fool Inside Value selections. Best Buy is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on Best Buy. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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