This Recession Is Gonna Make Me Rich (Again)

Investors today face a dilemma. With the Dow down more than 50% from its peak, top investors like Chuck Acre, Whitney Tilson, and Warren Buffett keep reminding us that stocks are cheap.

On the other hand, every day, newspapers report another round of layoffs, and bleak headlines leave us all wondering how low stocks can go.

So if you think today's an utterly lousy time to invest, well, I certainly can't blame you.

That said ...
Do you remember the Internet bubble? I sure do. When the Great Bubble burst in 2000, I saw my portfolio fall directly into the commode -- down 40% in the space of a few months.

See, back in 2000, I bought into the worst of the worst tech stocks. The overhyped Palm IPO. The overpriced Cisco (Nasdaq: CSCO  ) . The soon-to-be-bankrupt Winstar. And I paid the price for my mistakes. But as the market slowly turned around, I eventually recovered my losses -- and then some.

Of course, the financial crisis we are facing today is far more widespread and threatening than the Internet bubble was. Nevertheless, over the course of time, I learned that building real wealth consists of three simple, timeless steps:

  • Earn as much as you possibly can
  • Save as much as you possibly can from what you earn
  • Invest those savings

Working as many as five jobs simultaneously, my wife and I scrimped and saved. We cut corners. And no matter how much we took home from work, we strove (not always succeeding, I admit) to put away at least a third of our income for a rainy day. Then we invested it.

Invested in what?
I set out to describe the investment philosophy I learned from Motley Fool co-founder Tom Gardner. The result was a 2004 column I entitled "7 Steps to Finding Gems." You can read it for yourself just by clicking through the link, but here's the dime tour:

I invested in companies that:

  • Had superb management
  • Generated significant free cash flow
  • Grew that cash flow quickly, and
  • Traded for cheap prices

How low? To keep it simple, I like to see companies selling for a price-to-free cash flow-to-growth (P/FCF/G) ratio of less than 1.0. It's really a fancy-pants version of the PEG ratio, popularized by legendary former Magellan Fund manager Peter Lynch. I prefer free cash flow over GAAP earnings as a measure of profitability; while GAAP profits may be good enough for the SEC, I believe free cash flow is a more reliable indication of financial health.

Now here's the best part
It was easy finding great companies that fit this criterion after the Internet bubble burst. But ever since 2005, I've been having trouble finding many stocks selling for as cheap as I'd like to pay -- until today.

Thanks to the Great Sell-off of '08, stocks finally offer investors today the chance to buy good companies on the cheap. Running one of my favorite stock screeners in search of bargains last week, several likely suspects popped right up, each trading at or near my target valuation, and each rated four or five stars from our 130,000 member CAPS investment community:

Company

EV/FCF

EV/FCF/G*

Adobe (Nasdaq: ADBE  )

12.0

0.80

InterContinental Exchange (NYSE: ICE  )

13.7

0.75

Stryker (NYSE: SYK  )

9.6

0.68

Marvell Technology (Nasdaq: MRVL  )

7.5

0.47

Excel Maritime Carriers (NYSE: EXM  )

9.2

0.44

Sohu.com (Nasdaq: SOHU  )

11.1

0.26

Data from Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and Motley Fool CAPS. *Based on consensus earnings growth estimates.

One word of warning
Screens like this one can help you to find bargains, but they've got their limits as well. For example, if you dig a little deeper into Excel Maritime, you'll find that the company is being stiffed by two of its major customers. That's a big problem, since pursuing legal remedies is a long and expensive process, and other cash-strapped customers may try to force Excel to renegotiate their contracts as well.

But by and large, stocks that share these characteristics really are cheap. And with so many available to choose from, the time to start looking is now.

If you'd like a little help with weeding out the false positives today, you can read all of the research and stock recommendations from our team of treasure hunters at Motley Fool Hidden Gems, including their five best stocks for new money now, free for 30 days.

Click here for more information. There is no obligation to subscribe.

Fool contributor Rich Smith does not own shares of any company named above, but he's got a portfolio jam-packed with similar ideas. Stryker is an Inside Value recommendation and Fool holding. Sohu.com is a Rule Breakers pick. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (49)

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 March 10, 2009, at 10:56 PM, dana2009 wrote:

    I am a new subscriber to the retirement motley fool

    it appears that I have signed up for a series of come ons for more $$. I start to read an article and it is strictly another subscription. Let me know up front so I can save some time Thanks

  • Report this Comment On March 11, 2009, at 1:04 AM, cautiouswillie wrote:

    Amen to that comment. No harm pitching something, but be honest and up-front.

  • Report this Comment On March 11, 2009, at 4:50 AM, aquiline1 wrote:

    I agree with both. Pitches that are disguised as news are annoying. I wish I could think of this sight as more help and less sell.

  • Report this Comment On March 11, 2009, at 8:25 AM, biotechmgr wrote:

    I agree with the headline. The rest, well, I am making money but not by going long. Shorting into a bear market is how to make money, but that's not what TMF is pitching is it?

    I have to question TMF tactic of putting out numerous lures to the uninitiated to "scare" them into buying in a bear market. Buying a down market in a bull market environment would be a fair pitch. But this is an extraordinary environment. TMF has totally ignored the macroeconomic environment in its zealous sales efforts. But I guess that is business and chasing the buck is the thing. But in the long run you will lose subscribers as they either lose their money or lose their faith in TMF, or both should this bear market result as the worst since, well, we all know when...

  • Report this Comment On March 11, 2009, at 10:51 AM, leebertarian wrote:

    Now is not the time to go long, small value investors shouldn't unless they really know their stats. To that end FCF isn't enough, nor is D/E or other quick stats.

    I get the enterprise value first to get a value per share that's in the ballpark (careful capital intensive businesses, however, like cargo ships, not to discount their heavy capital & debt loads...).

    I also take their ROIC (available on TMF, MSN, etc.) make sure the ROIC is above basement (7 and up), calculate it 3 ways, average those numbers.

    I also calculate their weighted avg cost of capital (WACC) & maker sure the WACC-ROIC spread is positive (ROIC higher than WACC).

    There are really good value stocks out there with good WACC, ROIC, good FCF, good comparative P/B, P/etc. that are now to be had at a bargain (price below 1.5 * 2 year low), but they are rare.

    And one other thing: Be sure to look at the short ratios (days) & index futures before going in. It's not just bargains, it's timing as well.

  • Report this Comment On March 11, 2009, at 10:54 AM, leebertarian wrote:

    > I have to question TMF tactic of putting out

    > numerous lures to the uninitiated to "scare"

    > them into buying in a bear market.

    Same here. Too facile and thinly disguised marketeering.

    I come here for good financial guidance, but I can go to Investopaedia & other sites for real methodology instead of jawboning & market pumpage.

  • Report this Comment On March 11, 2009, at 10:59 AM, iamnik77 wrote:

    Sure the articles here are ads but the Motley Fool is a business after all. At least the "ads" have some educational value to them unlike the commercials that run during American Idol. This site still has a lot of valuable tips and information despite the ads and even within the ads. Why would anyone expect a business to not act like a business? As for those who think the Motley Fool is doing a disservice to investors by recommending stocks to buy into a vicious bear market, I'm guessing that Buffettology is not near and dear to your heart. Buying stocks at bear market discounts is vintage Buffett.

  • Report this Comment On March 11, 2009, at 4:54 PM, Schlobotnik wrote:

    Dana2009, I couldn't agree with you more!! I'm new to investing, and I guess I'm learning enough to justify the subscription price this year, but I don't see myself keeping this subscription after that. I get enough advertising shoved down my throat without paying extra for it!!

    iamnik77 - the problem is that editorial and advertising are not kept appropriately separate. When I flip through a magazine, I know which pages are advertising and which are articles. Not so with much of TMF content, at least what I have seen so far. Part of a "business acting like a business" is giving fair value to its customers for the money they spend. By using these tactics, TMF fails to meet that criterion for me.

  • Report this Comment On March 11, 2009, at 7:12 PM, socalclint wrote:

    I have to agree with previous posts. I've no intention of re-upping my membership. I can get more valid info, for free, w/out the constant sales pitch. I already PAID (or so I thought) when I bought the original pitch. Enough.

  • Report this Comment On March 11, 2009, at 7:17 PM, socalclint wrote:

    RE: Buffett

    While he may be the oracle of Omaha to some. Ask the shoe manufacturers in Mass. and a couple other states about his 'saviour' status? As I've stated previously on this site, Mr. Buffett bought US shoe manufactuers and promptly closed all USA production, and moved it to China. I know this because I own shoe stores and his move has drastically affected many people in this business. I've not a drop of respect for him and am always surprised by those who follow his advice blindly. The guy is filthy rich, a few people p/o'd at him for ruining thier companies or putting them out of work doesn't bother his him in the least. He's part of the problem, not part of the solution.

  • Report this Comment On March 14, 2009, at 12:38 AM, Daveoffv wrote:

    The Fool should have a policy of forbidding the use of Warren Buffet's name in any of their columns.

  • Report this Comment On March 15, 2009, at 11:42 AM, IAmPippi wrote:

    Re: SocialClint's comments on Buffett shipping shoe manufacturing jobs to China.

    Yes, this is part of the problem and it's seen in all industries but it's business, and businesses will make changes like that based on what the market will bear. Companies that outsource labor are doing what they do, to keep costs down. Ultimately they answer to the shareholders who want profits and dividends. It is up to us as the consumers to reject the business practices that we do not agree with. If you do not like a company's outsourcing policies, then do not do business with that company. You will probably pay more for American labor but enough consumers refusing to support companies that do outsource, will get their attention. Just a warning, though, avoiding outsourced goods is not as easy as it may seem.

    But do not fault the businessman for behaving like a businessman. Nobody was turning down their profit checks when Buffet's companies (or Dell or Wal-Mart or any of the other outsourcers) started shipping jobs overseas.

  • Report this Comment On March 17, 2009, at 9:44 AM, snakeflake wrote:

    Warren Buffet should copywrite his name. He would make more money in that than the market.

  • Report this Comment On March 18, 2009, at 3:52 AM, db71880 wrote:

    Socalclint,

    As a business owner or an employee, you are diametrically opposite the consumer.

    Would you buy $500 shoes, $1000 DVD players, $3000 desktop computers, $5000 laptop computers or $300 toys all in the name of patriotism ?

    Would any foriegn consumer buy an "Proudly made in U.S." widget if it costs 10 times a Made-in-China widget, even if the former is a superior product.

    Get real!

  • Report this Comment On March 18, 2009, at 4:25 AM, PrestonCheek wrote:

    I really don't understand the bashing of the fool in most cases. If you don't like to read the ads don't read them. You have to understand, if you wan't over the top professional advice, a several hundred dollar subscription is not going to get it for you. What they do here is give ideas for you to research and take to the next level, thats all guys and gals. You can pay thousands of dollars and surely get someone to tell you to buy here, sell there, but you will not get that here. There are some very knowledgeable people in the caps community that really give good advice, but again it only takes you so far, the rest is your own journey.

Add your comment.

DocumentId: 848284, ~/Articles/ArticleHandler.aspx, 4/23/2014 5:32:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement