The Cheapest Stock Around

Just how volatile has the stock market been over the past year? Check out this table of the S&P 500 index's closing price over the past four quarters:

Date

Closing Price

Change From Previous Date

Sept. 16, 2008

1,214

N/A

Dec. 16, 2008

913

(25%)

March 16, 2009

754

(17%)

June 16, 2009

912

21%

Sept. 16, 2009

1,067

17%

And that's just a quarterly snapshot. Anyone who has been in the market over the past year knows just how extreme the day-to-day fluctuations have been. In 99 of the last 252 trading days, the stock market moved more than 2% from the previous day's closing price, either up or down.

If you're a long-term investor, that stat should make you very excited.

Come again?
Sure, that volatility can be stomach-churning, but it also presents great opportunities for patient investors to profit.

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.

Or even rising at an incredible clip
Ezrati's findings suggest that even after the recent stock market rally, it's still a great time to start investing or add new money. All that's left to do is find a good place to park your capital.

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. Procter & Gamble (NYSE: PG  ) and Vulcan Materials (NYSE: VMC  ) are about 25% below their 52-week highs. Caterpillar (NYSE: CAT  ) and Fastenal (Nasdaq: FAST  ) have been clipped by about 30%, while Legg Mason (NYSE: LM  ) and Lockheed Martin (NYSE: LMT  ) are down roughly 35% each.

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, a collapse in construction, asset outflows, canceled contracts, 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.

Behind the buzz
The company is Jinpan International (Nasdaq: JST  ) , one of the world's largest producers of cast resin transformers (those buzzing boxes you see on street corners, not the giant robots that turn into trucks). Jinpan's transformers offer several key advantages over competitors' products: They are smaller and easier to maintain, while providing greater corrosion and fire resistance, more emergency overload capacity, and lower power loss.

Jinpan figures to benefit from a series of powerful catalysts. Electricity generation in its native China has been growing at a 10% annual clip for the past decade, and the company's new products targeting the alternative energy markets are gaining traction. But while Jinpan continues to fire on all cylinders, the stock is trading about 25% off its 52-week high.

Jinpan International is exactly the type of opportunity we look for at Hidden Gems: It's an underfollowed small cap with a strong balance sheet, significant insider ownership, solid free cash flow, and a great growth opportunity. 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.

Already subscribe to Hidden Gems? Log in at the top of this page.

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 Legg Mason. The Motley Fool owns shares of Legg Mason and Procter & Gamble. Jinpan International is a Motley Fool Hidden Gems recommendation. Legg Mason and Vulcan Materials are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor pick. The Fool has a disclosure policy.


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  • Report this Comment On September 19, 2009, at 11:15 AM, Eerkes wrote:

    stop telling everybody else about my favorite stock, boo, this article made it jump 8% today

  • Report this Comment On September 19, 2009, at 2:29 PM, asalcido1 wrote:

    "These stocks are cheap" I added Lockheed Martin (LMT) to my savings plan on August 25 and to date the stock has risen 7%. My positive outlook on this stock is 100 by the end of 2009.

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