Since reaching October 2007's highs, the Dow Jones Industrial Average is down a massive 40%. With its 44% drop, the S&P 500 is even worse; in fact, if you'd held an S&P 500 index fund for the last 10 years, your returns would be flat! But the flip side to this story is that stock valuations are cheaper than we've seen in a decade -- and even Warren Buffett is buying American stocks for his personal portfolio.
Many individual stocks have fared far worse than the broad-market indices. To take some extreme examples, financials from Citigroup and UBS to Colonial BancGroup
Which means ...
Now is a fantastic time to be a value investor.
Really. With stocks so widely sold off, and with pessimism so pervasive, you should make like a bargain shopper and pick out a few of the values that seem to be screaming, "Buy me!"
Of course, it is always difficult to believe that stocks could possibly go up when every day they seem to edge lower. We're human, after all, and a constant downward spiral brings an overwhelming sense of loss. It also makes us remember prior market crashes, like the Nasdaq bubble at the beginning of this decade or the Black Monday Crash of '87.
But if those or the recent memories make you want to shun the market, sell your stocks, and move to "safer" investments, let me be blunt: That's a recipe for disaster. The market crashes I alluded to before -- dot-coms and Black Monday -- were actually fantastic times to be net buyers of stocks. So although it may seem tough in today's chaos, now's the time to go shopping, because there are many superior companies trading at discount prices.
Blue-chip bargains
I encourage investors to look long and hard at blue-chip market leaders such as FedEx
FedEx's profit margins are being squeezed by a slowing U.S. economy and rising fuel costs. Shares, which are down more than 40% from their 52-week high, could go lower in the short term. But in the long run I expect the company to return to double-digit earnings growth as FedEx replaces its fleet with newer, fuel-efficient planes and the economy gets out of its slump.
Health insurer WellPoint has been struggling with a rising medical cost ratio (cost as a percent of premiums) and lower enrollment in its network. But those negative trends won't last forever since medical cost ratios fluctuate with insurance industry cycles. WellPoint also has enormous competitive advantages because of its size and exclusive use of the Blue Cross and Blue Shield brands in 14 states.
Recommending Berkshire Hathaway seems like a cop-out, because the company appears to be a no-brainer during most markets. But today, the shares are off about 40% from their 52-week high, even though it hardly seems likely that Buffett's empire is worth 40% less than it was a year ago. Sure, hurricanes Gustav and Ike took a bite out of the insurance subsidiaries, and the huge investment portfolio has suffered with the market downturn. Still, this is a company with a fortress-like balance sheet, and one of the few that can seriously benefit from the credit crunch and the big "for sale" sign on many prime assets.
Buffett has been hoarding cash for years, which he is now putting to good use, snapping up shares of major banks such as Wells Fargo and Bank of America
Two more options
I'm a big fan of the energy industry right now, because I think it holds some serious bargains. Share prices almost always follow the short-term price of the commodity, while value, for the best names, remains largely unchanged. Today I'll highlight Chesapeake Energy and Canadian Natural Resources.
Natural gas giant Chesapeake seems to have a love/hate relationship with the market. Wall Street appears to love Chesapeake when it's growing production and reserves while increasing debt and shares outstanding. But now that the company is reducing debt by selling developed assets, and slowing its growth rate to a more manageable level, the hate has set in. Based on recent transactions, the company's reserves and acreage are worth three times the current stock price.
Canadian Natural Resources is one of Canada's largest natural gas producers, but its Horizon oil sands project earns the company a spot on my list. Oil sands have a reserve life of more than 40 years, and phase one (of several planned) of the Horizon project is set to begin production this year, before reaching capacity in 2010. The company has shown a very disciplined approach to managing its cash and capital projects. By my estimate, you're buying a dollar for less than $0.50 with these shares.
Despite all these tempting examples, today I still see values even better than the ones I just mentioned.
More values ...
The historical outperformance of value investing should give you the confidence to buy in the face of pessimism. Buying superior companies at excellent prices -- and keeping an eye on the long term -- is how we advise investors at Motley Fool Inside Value.
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This article was originally published on June 27, 2008. It has been updated.
Philip Durell , co-advisor of Motley Fool Inside Value, owns shares of Berkshire Hathaway and Chesapeake Energy. WellPoint, Chesapeake Energy, and Berkshire Hathaway are Inside Value recommendations. Berkshire Hathaway and FedEx are Stock Advisor choices. Bank of America is a former Income Investor choice. The Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.
