One Outrageously Cheap Stock

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:

  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 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.


Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 02, 2008, at 4:30 PM, Got1toBurn wrote:

    Thank you FCC for taking you sweet ole time letting SIRI & XMSR merge. It's no monopoly & the DOJ agreed. So thanks again for letting my investment in a company we believe in go down the drain...!!! I hope the next president gets rid of the waste of space called the FCC.

  • Report this Comment On July 02, 2008, at 6:12 PM, McNabRanch wrote:

    In the 1950's we produced about 1/2 of ALL the world's goods....being the largest developed country left standing after WW2 definately helped. What's our dismal percentage now? We are getting our economic butts kicked by everyone. I could list a lot of reasons, largely having to do with the actions of those who rise to the top in our gov't and private sectors (most of whom seem to be doing quite well). But more important than who's to blame, where do you see our future economic growth coming from? And I am serious, not sarcastic.

    For what it's worth, I'm hanging on to my SIRI (and enjoying my sat radio) till it makes me some money or goes to zero. Too bad they don't sell "fear options"...I'd buy a ton of NAB.

  • Report this Comment On July 03, 2008, at 12:28 AM, SiriusInvestor09 wrote:

    Keep the faith Got1toBurn...I completely agree.

    Investors of SIRI need to use this recent tailspin as an opportunity to lower their cost per share's. I got mine down from $2.80 to $2.48 real quick! Eventually, this stock will climb to the Research in Motion levels...but I am such another Sirius delusional bull.

  • Report this Comment On July 05, 2008, at 12:34 AM, carolinaman8713 wrote:

    That's too funny FCC. Rush just signed a contract for almost ONLY 100 million less than Stern with Clear Channel, and that's okay. Call Sterns even with Rush because Stern has to pay his production costs out of his $500 Mil. It's okay that ANY communications company can make money like Clear Channel, however, SIRI and XMSR can't. Think about what the MP3 is doing by introducing themselves to the car industry, SIRI and XMSR have been, and are doing the same. Therefore, if you have a competitor like the MP3 where is the monopoly? Eventually, you'll kill SIRI and XMSR, and a year or two from know, you'll allow a Japanese company to monopolize the industry. But, that's okay, we are a forgiving County who doesn't mind giving to other countries! Billions. That's why our economy is at an all time low. Cramer was right, your lack of "timely" decision is going to bankrupt XMSR so that another company has to bail them out. If there was a way to kill two company's at once, you definately found the way to do it. I had SIRI in my car before I was an investor, and I would have had no problem with SIRI and XMSR merging then because there are too many venue's now who compete with them as a whole. FCC, if SIRI and XMSR is a monopoly in the majority of everyone's eyes, so be it. However, there is no reason why you couldn't have gotten off of your 12 sandwich, easy geasy, size 10 wearing, fat ass's and made a decision by now. I've seen laymen make quicker and more difficult decision at a traffic light. Regardless, I own alot of SIRI, and if you kill the merger, SIRI is on thier own, and the stock goes up anyway.

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