You Can Still Buy Stocks for 85 Cents on the Dollar

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Don't let the six weeks of market rallies trick you. There are still ways to get in on blue-chip companies at pre-rally prices. Closed-end funds continue to trade at sharp discounts to their actual holdings.

Shares of Tri-Continental (NYSE: TY) and Adams Express (NYSE: ADX) -- funds that have been around for decades -- are trading at a 15% discount to their Net Asset Values (NAV).

Tri-Continental, for example, closed at $8.60 a share yesterday. If it was a more conventional open-end mutual fund, it would be trading at its actual NAV of $10.13 a share.

Closed-end funds have been neglected by the media over the years. They never had the marketing arms of their open-end funds. They are bought and sold on stock exchanges throughout the day, but the somewhat similar exchange-traded funds (ETFs) are the ones winning over investors.

This doesn't mean that you should follow the herd and dismiss these closed-end vehicles. Let's take a look at Tri-Continental's largest holdings.

• Pfizer (NYSE: PFE)  
• Chevron (NYSE: CVX)  
• Wal-Mart Stores (NYSE: WMT)  
• JPMorgan Chase (NYSE: JPM)
• Johnson & Johnson (NYSE: JNJ)

If these sound like names that you can picture in your own portfolio, buying in through a company trading for 85 cents on the dollar probably sounds attractive. What's the catch? Well, it's not as if Tri-Continental is gouging its shareowners. It has a modest annual expense ratio of 0.68%. It also doesn't have a lot of built-in tax liabilities to pass on to its investors, as its smacked-down portfolio began the year with a net unrealized capital loss of $3.90 a share (so an investor can expect dividends, but no capital gains distributions in the near term).

Still looking for the catch? Well, there is a big one. The stock has historically traded at a similar discount. So buying in at a 15% discount sounds great, but you may also have to sell at a roughly 15% discount on the way out, unless the company converts to an open-end fund.

However, I'm a big fan of closed-end funds for a few reasons:

• Most stock funds trade at a discount to NAV.
• Because they have fixed asset bases, they don't have to manage for inflows or outflows of capital.
• Trading perpetually gives investors an easier way to time their purchases and eventual sales.

So keep an eye on closed-end funds, because somebody has to.

Other ways to get down with the bargains:

• Adams Express was one of my three closed-end fund bargains back in June.
• I looked at six foreign fund bargains two summers ago.
• Not so sure about your own funds? Check out the Mutual Fund Center.