Hunting Under the Radar

Value investing is the only strategy proven to beat the market over the long term. Consider: If you'd invested $1,000 in value stocks in 1968, you would now hold $35,000 -- compared with $18,000 if you chose growth stocks or a mere $8,500 if you'd picked the S&P 500. And if you don't think that's true, just look at how the value ethos has run roughshod over the market. From Warren Buffett and Charlie Munger at Berkshire Hathaway to Bill Ruane at Sequoia Fund to Rick Guerin at Pacific Partners, the disciples of Graham and Dodd have proved time and time again that hunting for value works in every kind of market.

Let's get hunting
There are six places I hunt for value for my Motley Fool Inside Value subscribers. They are:

  1. Wounded elephants
  2. Cyclicals
  3. Former glamour stocks
  4. Fallen angels
  5. Bankruptcy survivors
  6. Stealth stocks

Great names, to be sure. And they reap great rewards as well.

Today's lesson
Small, mid-cap, boring, and foreign companies, as well as recent spinoffs, fly under the radars of many investors. That's why I call this group "stealth stocks." But just because they're stealth doesn't mean they aren't subject to the market's irrational gyrations. In fact, they are frequently priced below their true values, and smart investors can do well by simply knowing more than their counterparts.

PHH (NYSE: PHH  ) was spun off from Cendant (NYSE: CD  ) earlier this year. It's a brand new $1 billion company, but because it was a spinoff, it was a stealth stock immediately worth watching. Why? Spinoff companies have a clear history and prior experience as a public firm, making them more or less immune to the gyrations that dog other IPOs. Moreover, stock in the new company is usually given to shareholders of the parent company, which are often large institutions like mutual funds. The institutions often have no interest in keeping those shares and sell without regard for the spinoff's prospects -- creating a buying opportunity for intelligent investors.

If you'd climbed aboard PHH just three months ago, you could have netted a cool 30%. But, unfortunately, this value boat has now sailed.

Foolish final thoughts
What stealth stocks are on my radar? I'll tell you: Small-cap Cabela's (NYSE: CAB  ) has been trending downward since its IPO a year ago, yet it sports a strong brand name and operates in the growing outdoors market. Mid-cap flooring maker Mohawk Industries (NYSE: MHK  ) is about as boring a business as it gets, yet the firm should benefit from reconstruction in the wake of Hurricane Katrina. Small-cap digital media company Avid Technology (Nasdaq: AVID  ) recently posted disappointing earnings and suffered a quick 25% haircut in July. The company, however, should continue to ride the high-definition wave. I'll keep watching these firms to determine if or when they become bargains, and you're more than welcome to join me.

If you want to join me in the hunt, consider a 30-day free trial to my Inside Value newsletter. We hunt down two market-beating values every month and are helping subscribers outpace the market by nearly eight percentage points. Click here to learn more.

Ask the masters: Value works. Happy hunting!

For related Foolishness, aim your mouse here:

This is a revised version of "Hunting for Value," which was originally published on Nov. 18, 2004.

Philip Durell is the analyst for the Motley Fool Inside Value newsletter. He does not own shares of any stock mentioned. Cendant is an Inside Value recommendation. The Motley Fool has adisclosure policy.


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