No matter how stoic you are, watching your stocks slide daily is unnerving.
At Motley Fool Hidden Gems, we certainly haven't been immune to the sudden and severe haircuts Mr. Market has been doling out recently. Since the beginning of November, we've had positions decrease 10%, 20% ... even 40%.
And frankly, we're excited about it.
Sure, seeing those big red numbers can be painful, but we know that volatility presents great opportunities for patient investors to profit. That's particularly true when a company's fundamentals and business prospects haven't declined -- only its stock price has.
In a recent report called "How to Stop Worrying and Learn to Love Volatility," (link opens a pdf file) Lord Abbett senior economist Milton Ezrati showed how market volatility "can actually help build wealth over time, especially for longer-term investors."
According to Ezrati, regularly adding new money in a volatile market allows an investor to purchase more shares at cheaper prices, thus lowering the effective cost basis. Interestingly, Ezrati's findings hold true whether prices are rising or falling.
Of course, few investors feel like adding new money when the market seems to shift momentum at the drop of a hat -- but this is exactly the time when you should consider committing new capital.
Ready to commit that capital? You're in luck -- the market has placed many fine companies on sale.
My Foolish colleague Tim Hanson recently highlighted a stock that he felt was outrageously cheap. Now Tim's a great analyst and a deadeye three-point shooter (we play basketball after work), but personally, I wasn't terribly outraged when I saw how cheap his stock was. In fact, I've found a stock that's cheaper.
These stocks are cheap
The fact is many good stocks are cheap right now. eBay (Nasdaq: EBAY ) and Motorola (NYSE: MOT ) recently hit 52-week lows. UPS (NYSE: UPS ) is sporting its lowest price-to-earnings ratio since the company came public in 1999. Polo Ralph Lauren (NYSE: RL ) was nearly halved. And these are all strong companies with killer brands.
As Tim correctly pointed out in his article, even supposedly "recession-resistant" stocks are feeling the pain. Dow Chemical (NYSE: DOW ) and GlaxoSmithKline (NYSE: GSK ) are each down 20% or more from their 52-week highs.
But there's a reason
I think those are all fine companies, and at today's prices, there's a decent chance they'll go on to post market-beating returns. But there's a reason each of them has fallen. Could be:
- A large asset writedown and the departure of a visionary leader (eBay)
- Contracting margins (Motorola)
- Higher raw material prices (Dow)
- General fears of slowing economic growth.
The key to exploiting market volatility is to find situations in which the share price has fallen, but the company's business fundamentals have remained unchanged (or even improved!). We've got a few companies that fit that bill on our Hidden Gems scorecard, including one that is even more outrageously cheap than Tim's company.
Don't bet the house, be the house
The company is CryptoLogic (Nasdaq: CRYP ) . It provides software and services for some of the world's most popular online casinos. After an abrupt exit from the U.S. market due to the 2006 Unlawful Internet Gambling Enforcement Act, CryptoLogic has built up its European operations. The company also brought in a new CEO with a bold vision, including plans to penetrate the lucrative Asian and mobile gaming markets.
CryptoLogic has $6 in cash per share, no debt, and analysts expect earnings to grow at a 20% annual clip over the next five years. The company also counts famed value investor Mohnish Pabrai among its largest shareholders.
CryptoLogic has no exposure to the U.S. housing crisis, credit crunch, or slowing economy, yet the stock is down 45% from its highs last April!
CryptoLogic is exactly the type of opportunity we look for at Hidden Gems: It's an underfollowed small cap with a strong balance sheet, shareholder-friendly management, and the ability to generate steady free cash flow. Better yet, the company's share price has been beaten down, even though its future prospects continue to look bright.
We've got quite a few companies that meet these criteria on our scorecard, and some of them are looking pretty cheap. If you'd like to start profiting from the recent market volatility, click here to take a free 30-day trial. You'll get access to all our recommendations and research, as well as our best ideas for new money now. And as always, there is no obligation to subscribe.
Rich Greifner has learned to love flaxseed oil, volatility, and the bomb. Rich owns shares of CryptoLogic. CryptoLogic is a Hidden Gems recommendation. Dow Chemical, GlaxoSmithKline, and UPS are Income Investor picks. eBay is a Stock Advisor selection. The Fool has a disclosure policy.