This Cheap Market Leader Is Set to Soar

The market has nearly doubled off its lows.

Mega caps Ford and Baidu have shot up 928% and 808%, respectively, off the market's bottom as both companies proved skeptics wrong.

All told, "a large number of stocks, perhaps even a majority of them, are already above where they stood at the stock market's all-time high in October 2007," according to MarketWatch's Mark Hulbert.

Professor Robert Shiller's cyclically adjusted price earnings (CAPE) ratio, which divides the current S&P 500 price by the the average earnings of the index over a 10 year period, sits at roughly 24 times earnings. The long-term average is 16, indicating the market may actually be overvalued.

Even Warren Buffett's favorite ratio, dividing the market's total capitalization by the U.S. GDP, which sits above 90%, indicate the market's getting frothy.

Meaning for the first time in a while ...

Cheap stocks are few and far between
If you're like me, this brings mixed emotions. Sure, you enjoy seeing the gains in your portfolio, but new opportunities are difficult to find.

It's tough to justify overpaying for a company. After all, value investing is a proven long-term strategy. According to Ibbotson Associates, $1,000 invested in value stocks from 1926 through 2009 turned into more than $5 million.

The same amount invested in the S&P 500 turned into less than half that. And the same amount in growth stocks didn't even make it over $1 million.

It's also the strategy that made Berkshire Hathaway's (NYSE: BRK-A  ) Warren Buffett a billionaire.

So it's clear that finding undervalued stocks makes the most sense. And why I'm hesitant to invest these days.

But one recent company I was let in on by my friend and colleague, Motley Fool Special Ops advisor Tom Jacobs, actually has me excited, even in this frothy market.

Here's why
Let's start with the big picture ...

The company operates in a duopoly, meaning it only has one major competitor. Together, the two control 70% of the market. But this company is the clear leader. This company also has the largest investment portfolio and greatest reserves in its industry -- giving it flexibility and the clear upper hand.

It's clearly cheap -- trading for only about 90% of its book value (a book value that's believable, mind you.) But it's still minting cash, buying back shares, and running smoothly, albeit with a recent dividend cut, which is actually a positive sign that they're looking to run more conservatively.

So what is the company?

Fidelity National Financial, (NYSE: FNF  ) , the leading title insurance company. Its main competitor is First American Financial (NYSE: FAF  ) . They make money "tollbooth-style," according to Tom Jacobs -- collecting premiums and closing fees on each sale or refinancing, then they invest these premiums until they need to pay claims.

So why is it so cheap?
Part of the problem is that the real estate market is still in some troublesome times. Some might believe it'd be smart to invest in beaten-down homebuilders like KB Home (NYSE: KBH  ) , Toll Brothers (NYSE: TOL  ) , PulteGroup (NYSE: PHM  ) , or even D.R. Horton (NYSE: DHI  ) . But builder confidence is still weak, and they face stiff competition from foreclosed properties.

But this doesn't mean home buying as a whole is a down-and-out industry. And that's why Fidelity National presents such an interesting, attractive opportunity.

Tom Jacobs says, "the minute somebody figures out that home buying has not completely disappeared, this stock will be up 50%, and we think it could be any time."

As housing prices continue dropping (becoming more affordable) and lending picks up (as bank investors demand greater returns on their lending portfolios), there will be more housing transactions, which means more business for the title insurance. And this means it looks like Fidelity's future is brighter than ever.

This company is only one of a handful of similar special-situation, deep-value style stocks that Tom Jacobs has recommended to members of Motley Fool Special Ops. All told, there are 15 more stocks he's recommended -- and The Motley Fool has invested real money in -- that are similarly out of favor, misunderstood, or overlooked.

Right now, for a limited time, we're about to let investors into this high-demand service. We expect the available positions to fill up very quickly, but if you're interested, I invite you to enter your email address in the box below for a video preview of three stocks Tom likes today. When you do, I guarantee you'll be among the first to hear from us when we open this service later this week.

Adam J. Wiederman owns no shares of the companies mentioned above. KB Home is a Motley Fool Big Shortshort-sale selection. First American Financial and Fidelity National Financial are Motley Fool Inside Value picks. Baidu is a Motley Fool Rule Breakers choice. Ford Motor is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Fidelity National Financial. Motley Fool Alpha sold puts on KB Home. 

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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