The Market Is a Cheap Hotel Shower

Have you ever taken a shower in a value-priced hotel somewhere? First, you have to figure out how to get hot or cold water out of the silly thing, and then the real games begin. 200 feet from the water heater, the changes you make to the water flow take a while to make a difference. "Ow, hot!" OK, turn it down a bit. "Frr-frr-frreeeezing!" That adjustment went a bit too far. Repeat until you find a happy medium, hoping that nobody throws it off by taking a shower in the next room or flushing the toilet downstairs.

That, my friend, is exactly how the stock market works.

Cold shower or lava bath?
In a perversion of Newton's third law of motion, every action in the market has an opposite and usually massive overreaction. Ever since the financial crash in September, we've seen months of enormous volatility. Mr. Market is still fiddling with the water knobs, still trying to settle on the proper temperature for his money shower. Before the panic started, the water was way too hot. Now, I think it's freezing.

Take blue-chip General Electric (NYSE: GE  ) , for example. A multinational giant with built-in diversification across several industries and geographies that is accustomed to trading for more than 20 times trailing earnings, GE's valuation has dropped to less than eight times earnings. Averaging out the stock's outperformance in the late 1990s and the recent woes, you could make the argument that GE is worth three times today's wimpy $160 billion market cap. Freezing, I said!

It's human nature to overreact a bit, of course. Burned by the hot water, we don't want to get scalded again, so we leap a bit past "reasonable" changes and straight into "way too safe." And this creates some massive investment opportunities for the contrarian adventurers among us.

Cheap stocks aplenty
Have a gander at these icy-cold steel baths:

Company

52-week
high

52-week
low

Trailing P/E

Trailing P/E,
1 year ago

Alcoa (NYSE: AA  )

$44.77

$6.80

4.6

14.6

Harley-Davidson (NYSE: HOG  )

$48.14

$11.54

5.0

11.9

Ingersoll-Rand (NYSE: IR  )

$47.31

$11.75

5.2

13.1

American Express (NYSE: AXP  )

$53.45

$16.55

6.6

14.9

General Electric

$38.52

$12.58

7.6

16.6

Texas Instruments (NYSE: TXN  )

$34.41

$13.38

7.9

19.2

Best Buy (NYSE: BBY  )

$53.60

$16.42

10.2

17.1

Data from Capital IQ, a division of Standard & Poor's.

All of these well-respected companies have seen their stock prices absolutely bludgeoned by an overreacting market. Best Buy is the only one of the lot to have rebounded significantly from 52-week lows, as all the others remain just a few clicks off the bottom. But rest assured that they've all seen volatility that makes nitroglycerin look timid by comparison. An opportunistic investor with some cash to spare could make a killing by investing in solid businesses like these at historical rock-bottom prices. Every single household-name business on my list sports at least three CAPS stars (and five for Ingersoll-Rand), and the Fool itself already owns two of them.

Mass psychology, individual opportunity
This theory of the stock market acting like a huge low-budget shower works because of the mass-psychology involved. It's the average reaction of thousands, or even millions, of individual investors and financial institutions. Each individual is still free to act much more reasonably and take smaller leaps between extremes of buying and selling. That could, would, and should be you, dear Fool. Let the masses go over the cliffs of insanity like a well-heeled lemming herd, and reap the rewards of the mispriced stocks they leave in their wake.

And the next time you check into a cheap motel, ask for a room as close to the water heater as possible. You'll thank me for that advice in the morning.

Further Foolishness:

Best Buy and American Express are Motley Fool Inside Value selections, and the Fool owns shares of both companies. Best Buy is also a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here -- but now he's drooling over some of them. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

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 December 19, 2008, at 3:31 PM, Brettze wrote:

    Anders

    You dont quite

  • Report this Comment On December 19, 2008, at 3:45 PM, Brettze wrote:

    Anders

    You dont quite grasp the grave gravities of our economy.. You dont understand that most of us are paralyzed by the awareness that our energy supplies ranging from solar to nuclear is not going to be adequate to support any further economic growth. It will not matter how many billions will be thrown into job creation by the Far Right Wing or the Far Left Wing of our government. Once we return to work , we will begin to draw more on our finite energy supplies once again. Energy prices in all forms will start climbing and short circuit our economic growth again in ever more frequent cycles than ever. This is why Big Oil stocks have yet to crash as shareholders are still so confident of another rebound in oil prices. We abandoned solar stocks once oil prices fell from $145 to $40 simply because we didnt recognize massive savings from fallen oil prices and yet fail to funnel those savings into alternate energy sources. We are brainwashed by capitalists that we are not prudent to do so and the supply and demand must be allowed to dictate that.. as if we can install so many gigawatts worth of alternate energy in a short order. We cannot do that... We have no choice but to proceed to install all kinds of alternate energy sources on a steady ramp starting right now.. Our government built our Interstate Highway System back in the 1950's because no capitalist will bother to... It is not profitable to do that but it is vital to our economy. Same may have to be applied to alternate energy which will probably never be profitable but promises to help us reduce our dependence on fossil fuels and nuclear fuel with corresponding and sizable savings stemming from price suppressions as a consquence of demand destruction of fossil fuels. This is the only way we can reduce our dependence on fossil fuels especially from the Middle East. As for alternate energy , we have yet to witness much more rapid progress on scaling up production at all. As of now, the distance between your showerhead and your water heater will grow indefinitely until hot water no longer comes out.

  • Report this Comment On December 19, 2008, at 4:14 PM, AlGalCo wrote:

    There is already a viable technology to replace oil with a solid alloy comprised of 95% common aluminum. As the oil prices have fallen, so has the price of aluminum. This means that since we can replace one commodity (oil) with another (aluminum) the technology is economically viable regardless of how low the price of oil drops. For more information, just google AlGalCo or for the one kW genset demonstration go to www.youtube.com and type in AlGalCo. This is a Purdue University technology ready for immediate commercialization.

  • Report this Comment On December 19, 2008, at 7:52 PM, rcpetty wrote:

    Anders,

    The end is coming, repent. All is foretold in Revelations. Is that is your message, or is is a secular ecopocalypse without the religious overtones?

    See this story for insight into your sky is falling hypothesis: http://blogs.usatoday.com/oped/2008/12/the-end-as-a-we.html Excerpts: Turn your attention to a strain of thought ascendant in secular, environmentalist America and you might be surprised to find ... apocalypse fixation, minus the Book of Revelation and anti-Christ parts. Call it the secular theology of environmental collapse — the fearful conviction that the hopelessly corrupt world as we know it has entered its death throes, with massive destruction stalking ever nearer. ... Call it the secular theology of environmental collapse — the fearful conviction that the hopelessly corrupt world as we know it has entered its death throes, with massive destruction stalking ever nearer.

    Given the huge challenges facing this country and the constant barrage of "be afraid!" messages from politics and pulpits, it's understandable that many of us have a close relationship with dread.

    Yet we should remain wary of doomsday fantasizing, in either its religious or secular form. For history shows that such thinking, whether it revolves around the wrath of God or the rage of nature, has a way of embarrassing the doomsayers — and, more important, hampering much needed progress along the way.

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