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 70% of all stocks traded in the U.S. are down since the year began. That's 4,756 names in the red. Another 3,111 of those names, fully 46%, are down 15% or more -- a list that includes big names such as Verizon (NYSE: VZ ) , DISH Network (Nasdaq: DISH ) , and Merck (NYSE: MRK ) .
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 that struggle to turn a profit, such as Discovery Holding (Nasdaq: DISCA ) . Companies such as Fannie Mae (NYSE: FNM ) that have seen their business fundamentally altered by the credit crunch are also hurting. The market has even stung "defensive" plays like Pfizer (NYSE: PFE ) .
But back to Barrett ... where we're starting to see a light at the end of the tunnel. Although the economy continues to be weak, Barrett reported second-quarter results that smashed expectations ... and the stock jumped nearly 40% on the news. It's no longer "outrageously cheap," but 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.
Enough said
Our goal as small-cap investors is to find stocks like Barrett -- fundamentally strong companies that the market has oversold. 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 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 Barrett Business Services. The Fool's disclosure policy is awesome.
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