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One Outrageously Cheap Stock

You know that political bumper sticker "If you're not outraged, you're not paying attention"? It might as well apply to the market these days. Starting in November, stocks started dropping ... and they haven't recovered.

Good -- even great -- companies are being sold down to levels far below their true worth, and investors are losing their savings. It's outrageous!

A shocking and somewhat interesting statistic
A whopping 77% of all stocks traded in the U.S. are down over the past three months. That's 5,182 names in the red. Another 3,101 of those names (fully 46%) are down 15% or more. That's two years' worth of gains wiped out in the cases of Texas Instruments (NYSE: TXN  ) , Comcast (Nasdaq: CMCSA  ) , Target (NYSE: TGT  ) , Applied Materials (Nasdaq: AMAT  ) , and many more.

So if you've lost money of late, don't feel bad. There has been no hiding from this downturn.

But let's also be honest: It hurts.

Time to panic sell
It's outrageous and it hurts, but what's the individual investor to do? The market is a monolith at times and can be hard to sway.

Case in point: Barrett Business Services. I found this tiny west-coast professional employer organization and staffing company during my work as the micro-cap analyst for our Motley Fool Hidden Gems service. At the time, it was trading for a little more than $20 per share. I liked the CEO, I liked the balance sheet, I liked the track record, and I thought it looked cheap.

What's happened since? You guessed right: It dropped 25%.

What's your next move?
See, the market has it in its head that the economy is worsening and the consumer is weakening. When fears are that broad, everybody gets punished.

Pain isn't reserved for companies that have never turned a profit in their history as a public company, such as Sirius Satellite Radio (Nasdaq: SIRI  ) . Companies that have already written off huge amounts of value, like Merrill Lynch (NYSE: MER  ) , are also hurting. The market has even stung "defensive" plays like Diageo (NYSE: DEO  ) -- hey, someone has to distill the spirits for all those depressed bankers.

And while losing money can feel outrageous, the most outrageous part about all of this is that even great companies are getting caught up in the chaos. Some of this makes sense (the economy is getting worse, after all), but some of it does not (it won't be terrible forever).

But back to Barrett: It still has a strong balance sheet, it's buying back shares and buying up weakened competitors on the cheap, and it's paying shareholders a nice 2% dividend. Could the stock drop further from here? Of course, but I still think it's outrageously cheap.

And I'm not alone. CEO Bill Sherertz told analysts on the last conference call: "If you guys want to sell [the company] down to five times earnings, maybe I will just buy the whole [expletive] thing."

Enough [expletive] said
After backing out cash on the balance sheet, Barrett today sells for just 6.8 times earnings. But that's not necessarily the point. It's suffering along with a few thousand more stocks on the market.

Investors, then, have two ways to express their outrage:

  1. Withdraw money from the market and wait for current market conditions to subside.
  2. Put more money in the market and take advantage of current prices to build a portfolio of excellent companies on the cheap.

We're all about the latter strategy at Hidden Gems, and we're excited because there are so many more buying opportunities today than there were last summer, when our returns were flying high. Fortunately, investing isn't about short-term returns; it's about making a fortune over the next decade or more.

While market conditions like we have now can be painful, they're precisely what make amassing a fortune possible. So swallow hard, and start buying. And if you're looking for a few great ideas, you can read all our research and recommendations at Hidden Gems, including our top picks for new money now, by joining free for 30 days. Click here for more information.

Tim Hanson owns shares of Barrett Business Services. Diageo is a Motley Fool Income Investor recommendation. The Fool's disclosure policy is [expletive] awesome.

Read/Post Comments (10) | Recommend This Article (238)

Comments from our Foolish Readers

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 January 10, 2008, at 4:43 PM, Gtrinvestor wrote:

    Nice article.

  • Report this Comment On January 11, 2008, at 11:45 AM, Susan112 wrote:

    Well balanced article. I feel a 3rd option (no pun intended) is to sell covered calls.

  • Report this Comment On January 11, 2008, at 2:41 PM, jcrash wrote:

    Susan, you are dead on. Market Volatility is high, stocks are near if not AT the bottom.

    Take something like NVDA, Buy it at $27, sell the June $30 call for $3. Now, you are even down to $24, and in all likelihood when this downturn is history you make $6 on your $24 investment in about 5 months. Not a bad return.

  • Report this Comment On January 11, 2008, at 4:51 PM, NewsVisual wrote:

    You failed to mention the upscale jewelry retailer Tiffany and Co. It’s projection of lower earnings are receiving a lot of hype today. The market appears to be responding too harshly to Tiffany’s statement, since the company’s sales performance was still strong overall. The fact that it’s able to develop its overseas stores should be a positive sign for investors, since it serves as a hedge against softness in the U.S. market. In any case, the dip in share price might be a good opportunity for savvy investors to pick up a good stock at a low price.

  • Report this Comment On January 16, 2008, at 3:50 PM, kalapatar wrote:

    Anyone who would invest in a company where all the assets go down the elevator at the end of the day needs lots of help

  • Report this Comment On January 17, 2008, at 1:23 PM, cummingsr wrote:

    I really love the fact that Tim Hanson actually OWNS SHARES of Barrett Business Services! To me this is a convincing indication of his conviction about the value represented by the company. I am frequently amazed when I read a glowing analysis of a company only to learn that the opinion is not backed up by some "skin in the game." That is, unless there is some prohibition which prevents positive reports on shares owned by the writer......and it would be useful if that were stated in such instances.

  • Report this Comment On January 18, 2008, at 1:42 PM, lupus62 wrote:

    Just want to agree with cummingsr.

    I always considered the "correct" position vis-a-vis conflict of interest to be somewhat backwards on this point. As long as the writer or editor DISCLOSES his/her holdings, we would be better off knowing whether the writer really likes the stock, hates it, or is trying to be objective.

    Cummingsr and I are at least twostrong in being pleased at Hanson's revelation.

  • Report this Comment On January 18, 2008, at 7:00 PM, ocathain wrote:

    I don't think it is enough for a pundit to declare his ownership of a stock. There is a risk in doing this because in this field he happens to be a person of influence. I am not suggesting for a moment that Tim Hanson is trying to influence a rise in the price but you can see the dangers. Perhaps it would help if he were to declare (although I don't expect him to ) the price at which he bought the shares. Then at least we can see at what level he is still with the stock.


  • Report this Comment On January 18, 2008, at 9:26 PM, sargento53 wrote:

    If you think you can invest solely using fundamentals, and not technical analysis then you're probably sitting on losses from "really good" investments in "solid companies".

    The signs were clear months ago, using TA to sell CFC in the $30's, C in the $40's, Wamu at $35, not to mention the AAPL's, GOOG's, etc etc. In fact using charts you would ahve sold long and sold short and would be cleaning up.

    There is no and never has been a direct correlation between earnings and stocks price. The only factor ruling price is good old Adam Smith's law of supply and demand. When there is more demand for a stock than supply the price will rise. When there is more supply than demand the price will fall.

    There are great companies with lousy charts and lousy companies with great charts. A stock chart and associated indicators are the only data driven source of information that tells you what people are actually doing with their money, relative to the stock, versus all the talking heads on TV and the Web telling you where to invest.

    A mix of TA and fundamentals is the key.

  • Report this Comment On January 19, 2008, at 2:00 AM, marquiseduchatel wrote:

    Again, the object is to make REAL money.

    Therefore it is never a REAL loss to sell out and wait for the proper conditions to buy back in.

    Technical analysis and a great deal of reading International news to understand the demographics of your intended investment(s) is the only sure way.

    We should never allow ourselves to be persuaded that taking profits and getting out of the market to regroup is an irrational and emotional event.

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