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. More than a year ago now, stocks began dropping ... and dropping … and dropping.

While we’ve had a nice little recovery of late, good -- even great -- companies are still selling for levels far below their true worth, and it’s not too late for you to take advantage.

A shocking and somewhat interesting statistic
Despite the recent rally, nearly 50% of all stocks traded in the U.S. are down since the beginning of 2008. That's a whopping 5,034 names in the red. Well-regarded names such as Procter & Gamble (NYSE: PG  ) , Berkshire Hathaway (NYSE: BRK-A  ) , and Nokia (NYSE: NOK  ) remain down 25% 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 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.

The pain isn't reserved for companies that aren't yet showing operating profits, such as Omniture (Nasdaq: OMTR  ) , or companies such as E*TRADE (Nasdaq: ETFC  ) , which was rocked by subprime exposure.

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 3% 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 the cash on the balance sheet, Barrett today sells for just 7.8 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.

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, 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.

Already subscribe to Hidden Gems? Log in here.

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

Tim Hanson owns shares of Barrett Business Services. Berkshire Hathaway and Nokia are Motley Fool Inside Value picks. Berkshire Hathaway and Omniture are Stock Advisor choices. Procter & Gamble is an Income Investor selection. The Motley Fool holds shares of Berkshire Hathaway and Procter & Gamble. The Fool's disclosure policy is [expletive] awesome.


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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 July 18, 2009, at 7:33 AM, Windsurfing1 wrote:

    Dear Tim,

    I like your articles, and I followed most of your China stock selections - Thank you, earned me good money. However, I do not share your view on BBSI. I do not think it is cheap. I do not agree on a bright future. It is in a very competitive, easy to enter and vunerable business. Maybe I am missing some hidden information. But to all that is available to the public, I do not see the point buying shares in Barrett Business Services

    Sincerely,

    Karel - Windsurfing1

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