You Can Profit From Panic

The Wall Street panic of 2008 has left us with a market that's down about 40% since the beginning of the year. While the broad market is down that much, individual companies -- including some of the titans of the global economy -- are down even more. Take a look at this practically unbelievable chart to see just how far some of the mightiest have fallen:

Company

Market Capitalization

Year-to-Date Price Change

Cisco Systems (Nasdaq: CSCO  )

$94 billion

(43%)

Apple (Nasdaq: AAPL  )

$84 billion

(54%)

Schering-Plough (NYSE: SGP  )

$26 billion

(40%)

Google (Nasdaq: GOOG  )

$91 billion

(59%)

Schlumberger (NYSE: SLB  )

$57 billion

(52%)

General Electric (NYSE: GE  )

$157 billion

(56%)

Bank of America (NYSE: BAC  )

$65 billion

(62%)

Many of those companies likely deserve at least part of their fate. For instance, General Electric's capital arm is quite the financial albatross these days, thanks in part to its ill-timed foray into subprime lending. Bank of America probably likewise deserves its spot near the cellar thanks to exposing itself to the heart of the subprime crisis by acquiring Countrywide Financial.

Tech stocks on sale?
On the flip side, in spite of its soft guidance, Cisco actually reported higher year-over-year earnings in its most recent quarter, as did its fellow Internet juggernaut, Google. Neither company carries outlandish debt, and both utterly dominate their industries. Yet, they've both shed between 40% and 60% of their stock value in the past year or so, despite having clean balance sheets and virtually no direct exposure to the catalysts behind the market meltdown.

It's just about enough to turn someone who has repeatedly argued the bear cases against both companies into a raging bull. After all, the time to buy is when there's blood in the streets, and the companies to buy are the ones discarded for simply having been splattered by someone else's gushing entrails.

Strength amid weakness
What make Cisco and Google particularly attractive right now are their incredibly strong balance sheets. Their businesses are being affected by this economic slump just like everyone else's. But unlike heavily leveraged financial firms, they've got strong piles of cash at their disposal and no pressing need to raise capital just to keep the lights on.

Those strong balance sheets give them tremendous advantages amid the panic. They can afford to wait out the downturn with their franchises largely intact. Even better, they can also use their position of financial strength to buy other companies at fire-sale prices. Either way, when things start to improve, they'll be building off a position of strength, rather than trying to rebuild a foundation washed away by excessive debt.

Why buy now?
There's no question that the economy is in the dumps and that the stock and bond markets are pricing in more significant pain yet to come. I believe that at some point, however, the lending market will reopen, the economy will pick up, and the stock market will rebound. The problem you face by waiting is that by the time it's obvious that things are finally getting better, the stock market will have likely already priced in that improving economic picture.

As a result, if you want a chance to get your hands on the biggest gains the eventual rebound has to offer, you need to start buying before it becomes obvious that things are improving. You'll likely never buy in exactly at the bottom, but given a choice, wouldn't you rather be early to a recovery than late?

Will you be ready?
The flip side of the panic that has infested the market is the tremendous opportunity it is leaving in its wake. Strong companies are available at lower valuations than have been available in years -- and in some cases, those valuations are lower than they've ever been in their histories as public stocks.

Such bargains don't last forever, but if you want to profit from panic, you need to take advantage of what the market is offering you while it's available. Not by calling the bottom, but by looking to strengthen your portfolio for the long term with great companies bought at attractive valuations.

If you're ready to start rebuilding your portfolio with bargains and need a few stock ideas, our Motley Fool Inside Value service recently published its five "best buys now" list. Come check out those five stocks and all our other recommendations with a 30-day free trial -- just click here for more information.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of General Electric and Bank of America, but boy howdy is he getting tempted by Google and Cisco. Bank of America is a Motley Fool Income Investor selection. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy has moved beyond panic.


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