The Cheapest Stock Around

No matter how stoic you are, watching your stocks slide daily is unnerving.

At Motley Fool Hidden Gems, we haven't been immune to the sudden and severe haircuts Mr. Market has recently doled out. Since last November, we've had positions decrease 10%, 25% ... even 50%.

And frankly, we're excited about it.

Come again?
Sure, seeing those big red numbers can be painful, but we know that volatility presents great opportunities for patient investors to profit. That's particularly true when a company's fundamentals and business prospects haven't declined -- but its stock price has.

In a recent report called "How to Stop Worrying and Learn to Love Volatility" (PDF file), Lord Abbett senior economist Milton Ezrati showed how market volatility "can actually help build wealth over time, especially for longer-term investors."

According to Ezrati, regularly adding new money in a volatile market allows an investor to purchase more shares at cheaper prices, thus lowering the effective cost basis. Interestingly, Ezrati's findings hold true whether prices are rising or falling.

Of course, few investors feel like adding new money when the market seems to shift momentum at the drop of a hat -- but this is exactly the time to consider committing new capital.

Totally outrageous
Ready to commit that capital? You're in luck -- the market has placed many fine companies on sale.

My Foolish colleague Tim Hanson recently highlighted a few stocks that he felt were outrageously cheap. Now, Tim's a great analyst and a deadeye three-point shooter (we play basketball after work), but I wasn't terribly outraged when I saw how cheap his stocks were.

These stocks are cheap
In fact, many good stocks are cheap right now. Netflix (Nasdaq: NFLX  ) and Teva Pharmaceuticals (Nasdaq: TEVA  ) recently hit 52-week lows. Electronic Arts (Nasdaq: ERTS  ) and Abercrombie & Fitch (NYSE: ANF  ) are trading just above their lowest levels in five years. Meanwhile, Motorola (NYSE: MOT  ) and Mercadolibre (Nasdaq: MELI  ) are each down more than 70%. And these are all strong companies with killer brands.

Even supposedly "recession-resistant" stocks are feeling the pain. Prescription-drug powerhouse Walgreen just hit a five-year low.

But there's a reason
I think those are all fine companies, and at today's prices, there's a decent chance they'll go on to post market-beating returns. But there's a reason each of them has fallen, be it volatile energy prices, competitive concerns, or general recession-fueled fears.

The key to exploiting market volatility is to find situations in which the share price has fallen, but the company's business fundamentals have remained unchanged (or even improved!). We have a few companies that fit that bill on our Motley Fool Hidden Gems scorecard, including one of my favorite personal holdings.

Texas tea
The company is Dawson Geophysical (Nasdaq: DWSN  ) , a tiny energy-services company based in Midland, Texas. Dawson acquires and processes seismic data for natural-gas and oil companies -- essentially, it helps these companies determine exactly what lies in their fields.

As energy prices have soared, so has demand for Dawson's services. Over the past 12 months, this $185 million company earned $35 million on revenue of $325 million -- about triple what it produced just three years ago. And even though energy prices have dropped since the summer, demand for Dawson's services should remain strong. Many of Dawson's crews are booked through the end of 2009, and promising new finds in the Appalachian Basin should keep them busy for years to come. However, even though the company continues to fire on all cylinders, the stock is trading more than 70% off its 52-week high!

Dawson is exactly the type of opportunity we look for at Hidden Gems: It's an underfollowed small cap with a strong balance sheet, shareholder-friendly management, and the ability to generate steady free cash flow. Better yet, the company's share price has been beaten down, even though its future prospects continue to look bright.

We have quite a few companies that meet these criteria on our scorecard, and some of them are looking pretty cheap. If you'd like to start profiting from the recent market volatility, click here to take a free 30-day trial. You'll get access to all of our recommendations and research, as well as our best ideas for new money now. And as always, there's no obligation to subscribe.

This article was first published Feb. 5, 2008. It has been updated.

Rich Greifner has learned to love flaxseed oil, volatility, and the bomb. Rich owns shares of Dawson Geophysical, which is a Hidden Gems recommendation. Electronic Arts and Netflix are Motley Fool Stock Advisor selections. The Fool has a disclosure policy.