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 71% of all stocks traded in the U.S. are down since the year began. That's 4,718 names in the red. Another 2,995 of those names (fully 45%) are down 15% or more -- a list that includes so-called defensive consumer staples such as Schering-Plough (NYSE: SGP ) , Kimberly Clark (NYSE: KMB ) , and Reynolds American (NYSE: RAI ) .
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. So I told people to buy it.
What happened next was frustrating: It dropped to $17, then to $14, and finally all the way down to $10 and change.
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 like Ford (NYSE: F ) and GM (NYSE: GM ) , which are posting losses, losing customers, and suffering under crippling debt loads. Yet it's not entirely irrational. Though a company like Wynn Resorts (Nasdaq: WYNN ) continues to move ahead with big projects in Macau and Las Vegas, the company's customer outlook is more uncertain than it was a few years ago. Until that clears up, these companies will be worth less in the eyes of the stock market.
But back to Barrett ... where we're starting to see a light at the end of the tunnel. Though the economy continues to be weak, Barrett reported second-quarter results that smashed expectations ... and the stock jumped nearly 40% on the news. Though it's no longer "outrageously cheap," the stock continues to have significant upside given its strong balance sheet, experienced management team, and willingness to deploy cash intelligently through dividends, share buybacks, and acquisitions.
Our goal as small-cap investors is to find stocks like Barrett -- fundamentally strong companies that have been oversold by the market. Then we buy and wait until the market recognizes its mistake. Sometimes, in Barrett's case, we get to buy more as the stock gets cheaper.
And though the market came to its senses with Barrett's recent earnings report, there are a few thousand more stocks on the market that have been sold off substantially over the past year. I know of a few more that look outrageously cheap. That's why I continue to put money to work in the market.
At Hidden Gems, we're more excited at the buying opportunities in today's market than at any other time in our five-year history. 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 and Wynn Resorts. Kimberly Clark is a Motley Fool Income Investor selection. The Fool's disclosure policy is awesome.