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The Cheapest Stock Around

No matter how stoic you are, watching your stocks drop sharply is unnerving.

At Motley Fool Hidden Gems, we haven't been immune to the sudden and severe haircuts Mr. Market has doled out recently. Since last September, we've had positions decrease by 20%, 30% ... 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 report called How to Stop Worrying and Learn to Love Volatility, 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 put 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. Ingersoll Rand (NYSE: IR  ) and Under Armour (NYSE: UA  ) have been halved. The same can be said of Noble (NYSE: NE  ) , Schlumberger (NYSE: SLB  ) , and Harley-Davidson (NYSE: HOG  ) , which is trading at its lowest price since 1998.

Even supposedly "recession-resistant" stocks are feeling the pain. General Mills (NYSE: GIS  ) shares have fallen by 17% from their 52-week high.

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 decreased consumer spending, competitive concerns, plummeting energy prices, 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 at Motley Fool Hidden Gems, including one candidate that looks ripe for new money now.

Don't be chicken
The company is Buffalo Wild Wings (Nasdaq: BWLD  ) . As the name suggests, this sports bar serves chicken wings and beer, primarily to men aged 25 to 40. The business sounds simple enough, but B-Wild is steadily building a national presence where none currently exists. The company now operates 588 locations in 40 states, up from just 200 in 2002.

Despite rising chicken-wing prices and softer consumer spending, B-Wild's first-quarter revenue increased by 35% year over year, while net income rose by 30%. What's more, management reiterated that it should meet its targets of 15% unit growth, 25% revenue growth, and 20% to 25% earnings growth in 2009. Yet even though the company continues to fire on all cylinders, the stock is trading about 25% off its 52-week high!

Buffalo Wild Wings 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 radar, and some of them are looking pretty darn cheap. If you'd like to start profiting from the recent market volatility, click here to take a free 30-day trial of the Hidden Gems service. As always, there is 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 Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings and Under Armour, which are both Hidden Gems recommendations. Under Armour is also a Rule Breakers pick. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (4)

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 July 15, 2009, at 4:01 PM, dipakpatel2006 wrote:

    Note: Contains spelling errors

    I am shorting this ahead of the earning tomorrow.

    The stock is up 6% today hitting 17.70. My shorts are at avg of $17.46

    My thoughts:

    * Main reason: New CEO would want to start with a clean slate. I expect them to revise down the shipping target or he will stop giving targets. Unit shipped will be revised down and earnings will come weak. Holding on to the shorts beyond 3Q will depend on what they announce tomorrow. Being at 1998 level does not make this a buy in my opinion. Weak fundamentals makes this a short to meadium term sell.

    * TALF is helping them as HOG benefits from a less-expensive short-term funding mix but pushing sells by providing financing to potential customers can't push the sales up forever (reminds me of GMAC led GM disaster!). Their customers are loyal but I expect consumers to reduce leverage given the economic uncertainties. Their revenies were pushed by cheap availability of financing via Harly financing arm HDFS.

    * Look out for a one-time provisioning expense hit in the second half of theyar with the reclassification of assets related to the 5/5 ABS transaction.

    * International demand is not improving or heklping to make up for loss of sales in the us.

    * High debt/equity at 180-190%; although I don't expect them to have difficulties raise more funds.

    * Unit shipment showing no improvement - visit their IR site to look at the unti shipment data

    * Buell - disaster! Has not picked up sales.

    * Rising unemployment pushing down the prices of used-bikes.

    * HOG finances its sales to consumers - expect additional writedowns to the retained interest

    * Last quarter's sales were decent only because of its sportster trade-up program.

    * FY09 Financials

    Revs: $4.5 bn, GP $1.4 bn, OP $0.54 bn, $0.05 write-downs in financing business, 40% tax rate = Net income $280 mm or $1.20-$1.25 EPS

    * Stock trading at 14x FY09 with degrowth in EPS FY09/FY08. Harly is a great brand and one can assign some value to it but zero or negative growth business in the medium term with book value per share of $10 makes this look pricey.

    Risk to my short call:

    * discretionary consumer names do well in terms of announcing 2Q EPS and revising up 2Hfy09 guidance. This could suggest higher consumer confidence.

    * improvement in consumer credit availability as almost 100% of HOG's sales are financed. However this is a longer term risk to the short call.

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10/24/2016 4:00 PM
BWLD $141.20 Up +0.90 +0.64%
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General Mills CAPS Rating: ****
HOG $57.10 Up +0.73 +1.30%
Harley-Davidson CAPS Rating: ***
IR $65.79 Up +0.03 +0.05%
Ingersoll-Rand CAPS Rating: ***
NE $5.76 Down -0.21 -3.52%
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SLB $80.31 Down -0.16 -0.20%
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UA $37.90 Down -0.04 -0.11%
Under Armour (A Sh… CAPS Rating: ****