How Safe Are Your Stocks?

Fear runs wild on Wall Street these days. Stocks are bouncing so much and so quickly that the major indices are moving a percent or two in a day. Smaller, individual stocks? Hope you brought your Dramamine. They offer a much more stomach-churning ride.

To get a feel for the queasiness, I ran a screen to find small caps that moved in the teens-to-20% range -- positive or negative -- over the past week. There were more than 150 ways to lose your lunch last week, and these are a half-dozen of the doozies:

Company

1-Week Price Change

E-House (China) Holdings (NYSE:EJ)

                         24.9%

Beacon Roofing Supply (NASDAQ:BECN)

                         20.6%

Kronos Worldwide (NYSE:KRO)

                         20.3%

Beazer Homes (NYSE:BZH)

                        (12%)

China Architectural Engineering (AMEX:RCH)

                        (13.1%)

DeVry (NYSE :DV)

                        (13.6%)

Screening and data from Capital IQ.

The scapegoat ate my nest egg!
Not a day goes by that someone doesn't blame the drop in these stocks on some background boogeyman. Lately, the theories usually involve that monster known as the "hedge fund." Other popular excuses include changed financial regulations, greedy commodities traders, and, I suspect, a malevolent planet crossing the moon's fifth quadrant.

Palliative blame-shifting might help us feel better about recent red ink, but the search for scapegoats is an endless task. Worse yet, it's fruitless. The way I see it, we can spend our limited time worrying about market mechanisms that may or may not affect our stocks, or we can concentrate on finding great business opportunities built for long-term value. I know where I put my hours.

History shows that what happens to a stock price during a given week or month (or even year) is almost always noise, nothing more. In fact, many of the companies that dropped like rocks last week were way up the week before.

In the short term, what Bernanke has for breakfast might seem to "move" a market or stock. (Waffles! 3/4 point cut coming!) But over the long run, only one thing will matter: Does this business create more value for shareholders?

Back to reality
Over the past year or so, a stock like Chipotle Mexican Grill  (NYSE: CMG  ) has first doubled, then gotten cut in half. Neither one of those moves had much to do with the company's long-term value. Chipotle is a great company, built for the long run, but the stock got ahead of itself. As such, the recent, brutal cuts were simply stock price corrections -- with no relationship to the company's underlying numbers.

I hold shares because I firmly believe they will be worth a lot more in the future. I don't need to get my payoff immediately, and when it doesn't come, I'm not interested in finding someone to blame -- I'm happy to buy more shares cheaply, or find somewhere else to invest.

Foolish final thought
Lately my plate overfloweth, as value-priced small caps move back onto my "buy" list. Since small caps tend to move more than the rest of the market when the Wall Street herd panics, they offer some of the best values around. If you're like me, and you see volatility as an opportunity, rather than something to complain about, you'd fit right in with our community at Motley Fool Hidden Gems.

We spend our time digging for the best small-cap opportunities out there, and we serve them up once a month -- with periodic, top-to-bottom reviews of current recommendations. If you'd like to take a look at what we've found this month, a new issue came out just last week, and a trial subscription is free.

Click here for more information.

Seth Jayson, a top-rated CAPS player, is also co-advisor of Motley Fool Hidden Gems. At the time of publication, he had shares of Chipotle (B shares), but no positions in any other company mentioned here. View his stock holdings and Fool profile here. Chipotle is a Motley Fool Hidden Gems and Rule Breakers recommendation. Fool rules are here.


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