Is This the Best of All Possible Markets?

The Dow closed under 11,000 last month, for the first time in two years. Gas hovers near $4 a gallon, jeopardizing the viability of airlines and automakers. The Fed is bailing out banks, mortgage lenders, and basically anyone that comes knocking on its door, hat in hand.

Is this market great or what?

Come again?
No, I'm serious. It's not every day that your favorite stocks beaten and battered so badly that they trade like plaid castoffs in the Goodwill bin. How often do you have the chance to buy Merck (NYSE:MRK) stock at a 40% discount from its highs? You could have gotten in cheap during the Vioxx troubles; those shares subsequently roared ahead to more than $61 each, launching the pharmaceutical back to the stratospheric premiums it typically carries. Today it's trading at a 30% discount to where it was a year ago.

Same thing with American International Group, whose shares are down almost 70% from last year primarily on concerns over its credit exposure. Yet insurance continues to make up the vast bulk of its business.

Don't be blue about the blue chips
The late Sir John Templeton famously suggested that the best time to buy stocks was at the "time of maximum pessimism." Another investing legend you might have heard of, Warren Buffett, said to be greedy when others are fearful.

Look in just about any sector of the market, and you'll find big, well-known blue-chip companies that the market is punishing. Sure, the fate of some hangs in the balance, as the price of oil or the dearth of credit seemingly pushes them toward the precipice of bankruptcy -- think General Motors (NYSE:GM) or Lehman Brothers (NYSE:LEH). But you'll also find plenty of companies that are beaten down on issues other than fundamentals.

Here's a list of blue-chip stocks that appear to have all the signs of long-term resiliency, but are still trading at significant discounts. I believe the market is pushing them toward the maximum points of pessimism despite the great value they still hold.

Source: Capital IQ, a division of Standard & Poor's.

The eternal optimist
Difficult market periods like this, even when they turn out to be so much worse than we think, compel us to whip our portfolios back into financial shape.

In boom times, small-cap flyers seem attractive, especially when all stocks seem to be rising. We tend to make risky or momentum-based investments so we won't get left behind. Yet when the worm turns and the markets get ugly, well, there's a reason they call it a "flight to quality." Investors will rightly seek big, safe companies that are likely to be around for a long time to come.

That's why I feel like Dr. Pangloss in Voltaire's Candide when I say that this is the best of all possible markets. You should want these blue chips to be depressed; you should want everyone around you to be gloomy. Because that's precisely the time that you can get "quality" at fire-sale prices.

The Foolish bottom line
I'm not saying that none of these companies are facing problems, or that their stocks won't drop lower. But in the long run, large, stable companies like these will survive an economic slowdown and go on to prosper and reward shareholders. Will you be invested when they do?

If you're looking for help identifying even more excellent companies on sale, our Motley Fool Inside Value newsletter recommends several stocks that are trading at a significant discount to what they're actually worth. You can read all about them with a no-risk free trial.

Fool contributor Rich Duprey owns shares of Merck, but does not have a financial position in any of the other stocks mentioned in this article. NYSE Euronext is a Motley Fool Rule Breakers selection. The Motley Fool has a disclosure policy.