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One Outrageously Cheap Stock

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 almost a year and a half ago now, stocks started dropping ... and despite some recent signs of life, they've mostly only gotten worse.

Good companies -- 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 87% of all stocks traded on the major U.S. exchanges are down since the beginning of 2008. That's 5,328 names in the red. Another 4,400 of those names (fully 73% of the total) are down 25% or more. That ignominious list includes widely held stocks such as Cisco Systems (Nasdaq: CSCO  ) , Microsoft (Nasdaq: MSFT  ) , and Citigroup (NYSE: C  ) .

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 about 50%.

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 struggle to turn a profit, such as Clearwire (Nasdaq: CLWR  ) , or flailing financials such as Morgan Stanley (NYSE: MS  ) . The market has even stung companies such as Kraft (NYSE: KFT  ) , which -- given its balance sheet, brands, and distribution -- should be more than able to handle a prolonged downturn.

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 buying back shares and buying up weakened competitors on the cheap, and it's paying shareholders a nice 3.3% dividend. Could the stock drop further from here? Of course, but I still think it's 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 and adjusting for a one-time investment loss, Barrett today sells for just 6.1 times trailing earnings. But that's not necessarily the point. It's suffering along with a few thousand more stocks on the market.

Investors, then, have two ways to express their outrage:

  1. Withdraw money from the market and wait for current market conditions to subside.
  2. 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, and we’re trying to take advantage of the best ones by adding them to our real-money portfolio.

Follow along by joining Motley Fool Hidden Gems free for 30 days. Click here for more information.

This article was first published Jan. 10, 2008. It has been updated. 

Already a Motley Fool Hidden Gems subscriber? Log in at the top of this page.

Tim Hanson owns shares of Barrett Business Services. Microsoft is a Motley Fool Inside Value pick. Kraft is an Income Investor recommendation. The Fool's disclosure policy is awesome.

Read/Post Comments (4) | Recommend This Article (63)

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 April 05, 2009, at 2:51 PM, prginww wrote:

    BBSI is mainly a stuffing and other HR services company in US. Given the facts that (1) the comapnies have been laying off people around the country; (2) no only the profit, but also the BBSI's business gross margin have been dropping; (3) the net profit for 2008 is $0.58 a share; (4) a quick check of the balance sheet shows that BBSI's shareholders' equity is $110.6m, HOWEVER among the $110.6m, $47.3m are GOOD WILL (yes, good will), THUS I am not surprise that BBSI is trading around $9 a share.

    The stock can go up a little bit, and can go done as well given the fact that the economy is in such a bad shape. But this is certainly NOT "One Outrageously Cheap Stock"!!!!!

    I am wandering the writer's motivation here. Especially in the article, he mentioned several well-known stocks in order to have a lot of readers to read about this silly article!

    Do your own research, it's your own money. To me, I will let the writer, and his family to buy this stock, the more the better. Good luck.

  • Report this Comment On April 06, 2009, at 1:15 AM, prginww wrote:

    Great comment- sometimes the Fool's motives escape me. Someone lost their focus while writing this fluff-piece.

  • Report this Comment On April 06, 2009, at 9:18 AM, prginww wrote:

    peanut butter and fluff, short it

  • Report this Comment On April 12, 2009, at 12:58 PM, prginww wrote:
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