You know that political bumper sticker that goes, "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 72% of all stocks traded in the U.S. are down since the year began. That's 4,848 names in the red. Another 2,974 of those names (fully 44%) are down 15% or more. These recent drops mean big names such as Texas Instruments (NYSE: TXN ) , Boeing (NYSE: BA ) , and Rockwell Collins (NYSE: COL ) have been dead money for three years!
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? It’s dropped 40%.
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 Lehman Brothers (NYSE: LEH ) , are also hurting. The market has even stung "defensive" plays such as Diageo (NYSE: DEO ) -- hey, someone has to distill the spirits for all of 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 2.7% 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 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 4.3 times trailing 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:
- Withdraw money from the market and wait for current market conditions to subside.
- 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 makes 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.
This article was first published on Jan. 10, 2008. It has been updated.
Tim Hanson owns shares of Barrett Business Services. Diageo is a Motley Fool Income Investor recommendation. The Fool's disclosure policy is [expletive] awesome.