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Learn to Love Bear Markets

When the market tanks, it really does hurt your bottom line. If you've been regularly socking away cash to your portfolio, the money evaporating before your eyes may well represent years of scrimping, saving, and sacrificing.

Anyone who can look you in the eye and tell you that losing that kind of cash is meaningless is either lying or fabulously wealthy. For those of us in the real world, a prolonged, nasty bear market is about as appealing as the noise you get when you scratch your fingernails down a chalkboard.

Falling like dominoes
This particular panic largely started when overall lending dried up in the wake of the subprime mortgage meltdown. Highly leveraged housing-related companies like homebuilders and mortgage financiers took it on the chin when their cheap capital evaporated. As their stocks collapsed, the impact cascaded throughout the stock market, critically wounding some prominent banks, investment brokers, and other debt-heavy companies.

Around that point, the Federal Reserve started to panic, bailing out troubled companies like Bear Stearns and cutting rates -- in retrospect -- below levels needed to stave off inflation. That, in turn, ended up debasing the dollar and driving up the costs of everything imported, especially oil.

With energy prices skyrocketing, people started cutting back wherever possible, thus putting the overall economy at risk. The market, reacting to such generalized fear, started falling in earnest. Hence, what started out as a few bad-risk mortgage borrowers defaulting on their loans turned into an overall stock market rout.

A silver lining
The worst may or may not be over, yet, but one thing is certain: When the whole market tanks -- as opposed to just the stocks of companies that deserved it -- some incredible bargains appear. Take these firms, for instance:

Company

Normalized
P/E Ratio

Market Cap
(in Millions)

Net Debt
(in Millions)

Debt Portion of
Total Capital

Valero Energy (NYSE: VLO  )

5.4

$16,764

$5,043

26.2%

Discover Financial Services (NYSE: DFS  )

8.2

$6,198

($6,876)

24.4%

Chubb (NYSE: CB  )

7.7

$17,120

$3,435

19.4%

Allstate (NYSE: ALL  )

8.3

$23,975

$5,272

21.7%

Loews (NYSE: L  )

8.8

$23,720

$7,148

25.9%

Wellpoint (NYSE: WLP  )

8.6

$23,646

$6,734

30.2%

NYSE Euronext (NYSE: NYX  )

7.9

$10,867

$1,374

23.1%

Each is:

  • Bargain priced, trading for less than 10 times trailing normalized earnings
  • Conservatively capitalized, carrying less than one-third of its total capitalization as debt
  • Worth more than $10 billion, making it big enough to withstand a prolonged recession

Yet, for the most part, their shares are down along with the rest of the market.

Keep your eyes wide open!
Of course, they're facing challenges, just like the rest of us. Valero, for instance, is facing a margin squeeze from the twin terrors of high oil prices and a narrowing spread between the price of crude and petroleum-based products. Yet, that's exactly why its shares are available for such a low price. The market sees the risk, and in its currently panicked state, ignores the potential reward that can occur once the market stabilizes.

Risk/reward imbalances like those are what make this such a fantastic time to be investing. When the market sees only problems ahead and ignores tremendous potential, the bargains it offers are simply too good to pass up.

We're excited about the panic-driven opportunities we're digging up at Motley Fool Inside Value. If you want to love this bear market and read up on the value-priced stocks we like for new money, click here for a 30-day free trial to our service.

At the time of publication, Fool contributor Chuck Saletta owned shares of Discover Financial Services, but held no financial position in any other companies mentioned in this article. WellPoint and Discover Financial Services are Inside Value selections. NYSE Euronext is a Motley Fool Rule Breakers pick. The Fool's disclosure policy learned to stop worrying and love the bomb.


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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 17, 2008, at 8:00 AM, DaveParting wrote:

    The Debt for DFS is in parentheses -- was this intentional?

  • Report this Comment On July 17, 2008, at 8:58 AM, TMFBigFrog wrote:

    Hi DaveParting,

    Yes -- it was intentional to have the debt for DFS in parentheses. The column is actually "net debt" -- or debt minus cash. The parentheses means it is a negative number. If you look at Discover's quarterly report, you'll see that it reports having more cash on hand than it owes in debt.

    Here's a link to a quarterly report that shows that: http://www.sec.gov/Archives/edgar/data/1393612/0001193125081... . You'll see that the "Cash and cash equivalents" line is about $8.765 billion, the "short-term borrowings" line is $0, and the "long-term borrowings" line is about $1.890 billion. Since it has more cash than debt, it has negative net debt.

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