One Outrageously Cheap Stock

You know that political bumper sticker that reads, "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 really 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 69% of all stocks traded in the U.S. are down over the past eight months. That's 4,614 names in the red. Of those, 2,717 are down 15% or more. And big names such as Starbucks (Nasdaq: SBUX), Capital One (NYSE: COF), and Fortune Brands (NYSE: FO) now haven't returned a penny in capital gains for the past three years.

So if you've lost money of late, don't feel bad. There's 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 it 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's dropped more than 35%.

What's your next move?
See, the market's convinced 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 aren't yet showing operating profits, such as Omniture (Nasdaq: OMTR) and Infinera (Nasdaq: INFN), or companies such as E*Trade (Nasdaq: ETFC) that were rocked by subprime exposure.  

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 these events make 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 2.5% dividend. Could the stock drop further from here? Of course -- especially if the job market in California remains in the dumps. But I still think it's outrageously cheap.

And I'm not alone. CEO Bill Sherertz told analysts on a recent 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 5.7 times trailing earnings. But that's not necessarily the point. It's suffering along with a few thousand more stocks on the market, and it barely eked out a profit in the most recent quarter.

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. 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.

Market conditions like those we have now can be painful, but they can also help you amass a fortune. So swallow hard and start buying. And if you're looking for a few great ideas, you can read all of 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.

This article was first published on Jan. 10, 2008. It has been updated.

Tim Hanson  owns shares of Starbucks and Barrett Business Systems. The Motley Fool owns shares of Starbucks and Infinera. Starbucks is a Motley Fool Stock Advisor and Inside Value recommendation. Infinera is a Rule Breakers selection. Omniture is a Stock Advisor pick. The Fool's disclosure policy is [expletive] awesome.