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 a year ago, 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 85% of all stocks traded in the U.S. are down over the past seven months. That's 5,582 names in the red. Big names such as Gap (NYSE: GPS ) , Harley-Davidson (NYSE: HOG ) , and Legg Mason (NYSE: LM ) are down 30% or more.
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 40%.
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 profits, such as Progenics Pharmaceuticals (Nasdaq: PGNX ) . Companies such as UBS (NYSE: UBS ) and Synovus Financial (NYSE: SNV ) that have seen the credit crunch fundamentally alter their business and assumptions are also hurting -- though Synovus is among the few that’s posted a positive return to investors year-to-date.
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 increased its share repurchase program, and it's paying shareholders a nice 2.7% dividend. Could the stock drop further from here? Of course, but it will be among the first to rebound if the economy improves. And no matter what, it’s still 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 7.6 times trailing earnings (after adjusting for a one-time investment loss). But that's not necessarily the point. It's suffering along with a few thousand more stocks on the market, even though it’s had two consecutive quarters of solid results.
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. 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 those we have now can be painful, 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 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 Motley Fool owns shares of Legg Mason. Gap is a Motley Fool Stock Advisor recommendation. Legg Mason is an Inside Value pick. Barrett is a Motley Fool Hidden Gems Pay Dirt selection. The Fool's disclosure policy is [expletive] awesome.