Depending on whom you ask -- and when you ask -- today's market environment is one of two things. It's either the best buying opportunity in years, or it's just the beginning of the mess and about to get a whole lot worse.
I asked a panel of Fool advisors and analysts about their thoughts on today's conditions. Here's what they had to say.
1. We're firm believers in the John Templeton philosophy of adding new money: "The best time to invest is when you have money." But with day after day of losses, and with the "R" word in the air, is now a good time to be investing in the stock market?
Seth Jayson, Motley Fool Hidden Gems co-advisor: It's always a good time, but you need to have a few caveats. First is realizing your time frame. I never invest money that I'm not happy to send on vacation for three years minimum. You can't tell when you'll be right -- and you won't always be right, anyway -- so you need patience, and you need to be sure you won't need that money for, say, a house, car, or kids' college tuition. The other is paying the right price in the face of risk. Buying cheap can cover up for a multitude of sins, including being a year or two early to the bull-market recovery.
Bill Barker, Hidden Gems and Hidden Gems Pay Dirt senior analyst: I think so -- at least that's how I'm acting. After not putting any new money into the market for several months, I did invest some new money last week. The market's valuation, at a bit less than 16 times operating earnings, essentially has it trading at as good a price as it has seen since early 1995 -- and that was a pretty good time to be adding money to the market.
Tim Hanson, Hidden Gems micro-cap analyst: My short answer: Yes. My longer answer: Yes, so long as you're buying companies you're willing to hold for the next three to five years with money you don't need to touch for the next three to five years. A company that fits this mold would be Starbucks (Nasdaq: SBUX ) -- it has a strong balance sheet, a durable brand, reinvigorated management under Howard Schultz, and the opportunity to improve operations here in the States as well as expand operations abroad. Of course, the market could still drop from here, taking good stocks like Starbucks with it. The only way to avoid panic is to make sure that your money in the market is not money you're counting on for near-term survival.
2. These past few months have hit many stocks in many industries -- it feels as though nothing has been spared. What sectors or stocks do you think have been unfairly hit?
Jayson: Apparel chains and some retailers have been absolutely slaughtered. Some deserve it, but the best are being thrown out with the bad. There are refiners and other oil-service outfits that are being hit on the whole recession thing, but I believe we're not in for the usual kind of recession. I don't see oil demand dropping off that much.
Barker: The ones that are down 30% or 50% or whatever that have solid balance sheets and continuing strong operating cash flow. Companies that are in no danger of being hit truly hard by the credit market problems but are going to see earnings temporarily hit by a slowing economy. You can buy Harley-Davidson (NYSE: HOG ) for less than 10 times earnings right now, which I think is remarkable, given how financially stable the company is, and given its growing international sales.
Hanson: Take this with a grain of salt, since I spend my days dealing with micro caps, but tiny companies have just been indiscriminately pummeled of late. The Russell Microcap Index is already down more than 11% this year. This isn't to say that micro caps are a great buy. Indeed, because of their small operations, many don't have the financial strength to withstand a recession. But if you can find a recent decliner that has competent management, a balance sheet with lots of cash and no debt, and a business strategy that makes a lot of sense, it's a candidate for a stock that's been unfairly hit. U.S. Home Systems (Nasdaq: USHS ) , for example, trades for some ridiculously low multiples now, has more than $8 million in cash and no debt (according to CEO Murray Gross), and benefits from a relationship with Home Depot (NYSE: HD ) that should provide it some cover.
3. Inverting the previous question, what sectors or stocks deserved their recent haircuts?
Jayson: Banks, credit insurers and ratings agencies, and homebuilders, definitely. And they haven't deserved their recent pop, either. These guys not only have horrid balance sheets; their credit-bubble gravy train is gone for good. Back to business as usual will be better for us and our economy in the long run, but it means no more free lunches for the folks who fomented one of the biggest pyramid schemes in economic history.
Barker: Financials. These are the companies that have past earnings that aren't credible because of their lending practices and because of excessive risks taken on for what turns out to have been very little reward. Merrill Lynch (NYSE: MER ) , Citigroup (NYSE: C ) -- we still don't really know what their reported balance sheets actually mean. Neither do they, of course, so I can't blame investors for departing in droves.
Hanson: As recently as six months back, a lot of stocks had a lot of hope priced into their shares. Now that the economy is slowing (or recessing, depending on whom you talk to), there's less reason to believe that this hope will lead to profits. Jones Soda (Nasdaq: JSDA ) , for example, is a company that can't seem to get its act together. It has a nice brand and a good concept, but it's not catching on with consumers, and the company pays a lot to market its products. An unprofitable exotic juice and soft-drink company that's still looking for a permanent CEO isn't an attractive place to invest as the economy flirts with recession.
4. We often preach temperament, patience, and long-term investing. But when your portfolio is bleeding red, theory and practice often go separate ways. What's the most important thing investors can do to keep their cool in times like these?
Jayson: Look back at history and study when and how investing fortunes are made. Hint: It's not buying during market euphorias. It's understanding the real value of businesses and buying stocks when everyone else is paralyzed with fear.
Barker: Only have money in the market you can afford to see decline 20%. Keep a long-term perspective, and be appropriately diversified. Shower frequently -- that helps.
Hanson: If you haven't read them, I recommend these letters from Warren Buffett to his shareholders. They explain exactly how, why, and what the rewards are from having a steady disposition in the face of even the worst market storms. If they don't help you avoid panic, nothing will ... except morphine ... access to which is mostly illegal.
For the Hidden Gems team's five favorite small-cap stocks for new money -- and for more from Seth, Bill, and Tim -- test-drive the service free for 30 days. Hidden Gems recommendations are beating the market by nearly 20 percentage points since inception in 2003. Click here to get started.
Brian Richards does not own shares of any company mentioned. Seth Jayson owns shares of Home Depot and is short Home Depot call options. Bill Barker owns shares of Harley and Home Depot. Tim Hanson owns shares of Starbucks and U.S. Home Systems. Starbucks is a Stock Advisor pick. Home Depot is an Inside Value recommendation. Jones Soda is a Rule Breakers selection. Read about the Fool's disclosure policy here.