The stock market is tanking, the government is intervening, financial and political uncertainty abounds, and respected money managers -- thanks to redemptions -- are suddenly seeing less and less money to manage. Things are looking a bit grim.
But if you stand back and take stock of the letters these same money managers recently sent to shareholders, you get a very different perspective.
For example ...
Third Avenue's Marty Whitman revealed in his Aug. 11 letter that he recently purchased $1.5 million worth of Third Avenue Value (TAVFX) shares, and noted that he's "especially enthusiastic" about the fund's prospects. According to Whitman, the securities Third Avenue specializes in buying are "trading at ultra-attractive prices" -- and I know he's brought staff back from the firm's Singapore office to help him better analayze the opportunities in the market today.
Bruce Berkowitz told his Fairholme (FAIRX) shareholders that "We continue to ignore the [panicking] crowd." Using sales, new inflows, and "cash held for stressful times," the fund is buying shares of dirt cheap health-care stocks such as Forest Labs and Wellcare.
And then there's T. Rowe Price's Brian Rogers, who reported a recent buying spree that included financials such as American Express (NYSE: AXP) and Goldman Sachs (NYSE: GS), industrials such as Boeing (NYSE: BA) and Alcoa (NYSE: AA), and consumer discretionary firms such as Whole Foods (Nasdaq: WFMI) and Macy's (NYSE: M).
Yes, the best money managers are buying.
Now then ...
Don't assume that these money managers are ignoring the current financial calamity. There's no escaping it.
But there's also not much any of us can do about it, other than taking advantage of currently depressed stock prices to buy shares of companies that:
- Will be in business 10 years from now.
- Will be bigger 10 years from now.
- Will generate significant amounts of cash in each of the next 10 years.
Take a company like Nike, for example. With $2.8 billion in cash and just $625 million in total debt, it's in no danger of becoming insolvent. And with consumers worldwide stressed by nearly unprecedented food and energy costs, the company is still solidly profitable. While this holiday season will likely be tough, holiday seasons 2009 through 2018 will likely be healthier. Yet at 15 times earnings, the stock looks cheap, and given the announcement that the company will be buying back $5 billion worth of stock, it seems that Nike management agrees.
The question to ask yourself is not how a company will hold up in the fourth quarter of 2008 -- it's how it will hold up over the next decade. If it has a durable brand, cash on the balance sheet, and a verifiable track record as a quality operator, then I believe it will hold up quite well.
That's the easy money
If you're willing to dig in and get your hands dirty, however, you can find even better bargains among the unknown stocks that professional analysts and investors simply aren't paying attention to. As Andrew Ross Sorkin wrote in a recent New York Times column, "[I]t is hard to find good research on small companies. All the focus has moved to large companies where the big money is sloshing around."
That is why small caps are the best stocks to profit from the drop -- and why, while I'm happy to reveal some of my best large-cap ideas to you right now, I'm keeping my best small-cap ideas for our Motley Fool Hidden Gems subscribers.
If you'd like to see what they are, you can join Hidden Gems free for 30 days -- you'll see all of our research and recommendations, along with our best bets for new money now. Click here for more information -- there's no obligation to subscribe.
This article was first published on August 22, 2008. It has been updated.
Tim Hanson
owns shares of Whole Foods. The Motley Fool owns shares of American Express. American Express is a Motley Fool Inside Value recommendation. Whole Foods is a Stock Advisor pick. Fairholme and Third Avenue Value are Champion Funds selections. The Fool has a disclosure policy.
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