Take Advantage of the Market's Chaos Factor

One would think the market would have been staggering lately, given fretful economic issues such as Washington's fiscal battles, rising food prices, and continued weakness of many consumers' spending power (which will surely be worsened by higher prices and pinched take-home pay from the payroll tax hike).

Oddly enough, though, the market's been doing some strangely euphoric things. Take last week's big market news: The S&P 500 hit 1500 for the first time in five years.

Many investors may be wondering how to navigate this crazy market. It's tempting either to buy into such a rally because everybody's doing it, or to decide to avoid it because so many stocks are probably overpriced.

Here's one method I believe in for long-term investors: Pare down your watchlist to the highest-quality businesses with the best brands and financial soundness, and focus on purchasing shares of those companies. It's preferable to buy them at bargain prices, but don't necessarily let the noise of market rallies and routs influence you too much. The most important factor to look for in the midst of the market's chaos is quality.

When stock prices drop, ask: Is the company's brand really broken?
Last August, I took advantage of temporary weakness in Starbucks' (NASDAQ: SBUX  ) share price to add a second position in the Prosocial Portfolio I'm managing for Fool.com. Needless to say, I don't regret the move, given Starbucks' solid earnings report last week, despite a challenging economic environment. Impressive revenue in the U.S. and Asian markets offset weakness in Europe, giving just one reason to believe this company has what it takes to get through many environments.

Even better (and looking far beyond last quarter or next), Starbucks has also been positioning itself to take advantage of trends other than the global thirst for coffee. Acquisitions such as the Evolution Fresh juice brand and Teavana will give it more breadth for the very long term.

Chipotle  (NYSE: CMG  )  has recently skidded from investors' good graces. My first purchase of Chipotle shares for the Prosocial Portfolio was admittedly poorly timed, near its highs, but my second purchase for the portfolio took place after its subsequent plunge. (I added it to my personal portfolio, too.)

The bottom line: I don't believe that Chipotle's brand is in grave danger, nor do I buy that lower-cost Yum! Brands' Taco Bell can truly threaten Chipotle's future success. Responsible aspects, like Chipotle's emphasis on "Food with Integrity," give it major competitive advantage against lower-scale rivals. For the long haul, I'm not concerned about Chipotle even if it has recently lost some of its regard in many investors' and analysts' perceptions.

Although Chipotle trades at 30 times forward earnings, it's well off its highs, and also suffering from a great deal of analytic pessimism lately.

I've got no money on Apple (NASDAQ: AAPL  ) , either personally or in the Prosocial Portfolio (and I probably won't until some labor and environmental issues are more deeply addressed by the company), but for investors who aren't concerned by such aspects, Apple looks like a ridiculous bargain right now.

Even if the Apple brand is losing some luster and some product momentum, it's currently trading at just nine times forward earnings and has a PEG ratio of 0.71. I'm sorry, folks, but that is dirt cheap, especially given its huge treasure trove of cash and the fact that the brand isn't broken.

Part of the chaos of the market is psychology and irrationality, and the fact that Apple has gone from being a stock that headlines seemed to suggest should be in every American portfolio to one that has plunged and is surrounded by serious fretting and angst means bargain-hunting investors should seriously consider getting in now.

Capitalizing from chaos
Look for the best companies through thick and thin, bull and bear markets, and particularly when their prices recede on temporary bearishness. However, while we should love cheap, we should be wary when cheap indicates the very real possibility of failure.

For example, forget Best Buy (NYSE: BBY  ) . It may be trading at just seven times forward earnings, but its plunge is completely rational. This retailer's brand is tarnished and its perceived usefulness to consumers has been damaged, possibly irretrievably so.

Given recent adjustments to Best Buy's cash flow projections, one of the retailer's few positive attributes that could be key in saving the company from a nasty outcome is deteriorating. Investor, beware.

There are thousands of publicly traded companies to invest in, but research shows that most of them will turn out to be duds over the long term. Meanwhile, the market is incredibly inefficient, in the short term, anyway.

For individual investors who keep an eye out for the highest-quality companies to hold for the long term, the chaos factor can actually help build a strong portfolio even for the worst times.

More expert advice from the Motley Fool
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more important, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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  • Report this Comment On January 28, 2013, at 3:08 PM, Berstein wrote:

    When now Dows and S&P have hit all time highs, there are barely any cheap stocks than Nokia.

    Nokia which has come down 90% from its highest is a stock to consider,

    because it is extremely cheap and the reward can be one of the biggest in NYSE for the future.

    Nokia is a stock with great upside opportunity and why:

    1) Nokia´s bankruptcy is already remote.

    Nokia has increased net cash to about $5.7 billion.

    Nokia´s worst loss has been $290 million a quarter in 2012.

    Even with this kind of loss, Nokia could still deal by its own net cash for at least 4 years!

    2) Nokia won´t have to deal with that kind of loss in the future and why

    A. Nokia has cut cost expenses. The layoff in 2012 starts to be fully effective in 2013.

    B. Now Nokia has to pay royalty to Microsoft, but Nokia has patent incomes.

    C. Nokia has managed to make the important tough work for the basis of its new platform WP.

    Nokia has already sold over 15 million Lumia phones up to date (9.9 million units from Lumia debut till the end of September 2012 + 4.4 million units in the last quarter of 2012 + January 2013).

    D. Nokia has now a high end phone that can make “halo effects” and be compared to Apple´s and Samsung´s most high-end phone, the Lumia 920.

    The demand of this phone is still high in many countries around the world. The 4Q12´s Lumia sales did not include the sales of Lumia 920 in many countries, such as India, Asia-Pacific, UAE, Latin America, and many other countries around the world yet, because the phone was arriving these countries only starting from January 2013.

    Even in Europe, many countries start to get this phone starting 1Q13, for example the Netherlands announced the phone arriving in January.

    And China Mobile received only first lot of Lumias 920T around Christmas, the second and third lot and further have arrived China, and the phone is still selling out.

    E. China Mobile deal. When now, both China Mobile and China Unicom are subsidizing the Lumia 920 heavily, the 2-year or 3-year contract is starting from

    0 or 1 yuan, and considering only less than 1/5 of Chinese people are using highest-end smartphones,

    this will result into a huge number of 2-year or 3-year contract users for Nokia in China! Besides, 3G penetration in China is still very low, there is a huge opportunity there. Additionally, among the highest end phones, Nokia Lumia 920 is significantly much cheaper than for example iPhone 5 and Galaxy Note II. Nokia has an advantage in both the price competition and the biggest carriers´ backing in China!

    F. Nokia Siemens Networks (NSN). During these few months NSN has won many 3G and 4G contracts in many countries.

    According to NSN, they have network equipment that can boost the speed of 4G many times faster. This shows that, beside PureView camera technology, HD+ sensitive screen technology, advanced mapping platform HERE and City Lens, Nokia has also top innovations in building 4G LTE networks.

    G. MWC is coming soon. There are still more to come from Nokia.

    According to The Verge, Nokia will launch Lumia Eos (PureView camera phone), Lumia Catwalk (international flagship phone) and Lumia Laser (Verizon flagship phone).

    According to CEO Stephen Elop, Nokia is also planning a lot of interesting things with Verizon.

    Nokia is likely launching tablet as well, even with some loyal fans of Nokia around the world buying some of Nokia´s tablets, this will be a good gain for Nokia.

    Nokia will launch more Lumia phones in the coming months to attract different consumer demands. More lower price-point,

    mid-range and high-end WP8 Lumias are to come.

    In 1Q13, beside Lumia 920 and Lumia 820 which are making their way to more markets and with better supplies, Nokia is also attracting the mass markets with budget WP phones Lumia 620 and Lumia 505.

    F. Asha phones. Asha phones are now selling almost 10 million units a quarter.

    Asha phones are affordable and competitive. Asha phones have now more and more smartphone features.

    Apart from features like Facebook, Twitter etc. Asha phones

    have internet access and access to thousands of Nokia´s most popular apps.

    Nokia has also brought an app called “Nearby” into Asha phones. Nearby is almost the same as City Lens in Lumia phones which is exclusive and unique in mapping and location data.

    There is still plenty of room for Asha phones to grow, because the price is competitive (cheapest android is right now about $100, while Asha is only about $70 without any contract).

    Apart from the features and price mentioned above, there are important and good selling points in Asha phones against cheapest androids, for example 40 free most popular games!

    Asha phones are still profitable for Nokia, because the OS is from Nokia itself, Nokia does not have to pay royalty for it.

    3) While bankruptcy is remote, Nokia´s stock price is still heavily undervalued.

    NYSE tech stocks are usually 2x book value, Nokia is still way much below that.

    According to Morningstar´s valuation, the sum of parts of Nokia (NSN, Navteq, feature phones, smartphones and patent portfolio)

    is worth much more than Nokia´s stock price right now, not to mention Nokia´s $5.7 billion net cash added to that value!

    Two years ago NOK was still about $15, now the stock is only over $4, the reason is that the stock has been over sold.

    Nokia is the most short sold stock in both Helsinki and New York! The shorts are still over 20% in Nokia´s total share number which is approximately 3.75 billion shares.

    This is a huge number, considering Apple´s short interest is only around 1% and Samsung´s around 2%. When Nokia is here to stay, the shorts need to be covered and the stock will skyrocket from these levels.

    Nokia Apple Intel Microsoft Cirrus Logic

    0.32 3.0 2 3.0 3.76

    Note that Nokia is currently selling at 0.32 price/sales ratio. This means that if the company manages to restructure and return to normal profitability, the stock has the potential to become a 10x bagger (even from today’s price levels) – assuming the market will value Nokia 3.0x sales like Apple or Microsoft. But even a price/sales ratio of 2, like Intel has, means a 6x bagger from these levels.

  • Report this Comment On January 28, 2013, at 6:32 PM, dan1931 wrote:

    HOLD ON DDD, BUT NOT DO ANY EW BUYING, SOUND ABOUT RIGHT ?

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