You Can't Help But Go Nuts at This Opportunity

The strength of value investing shouldn't be overlooked, given the copious academic evidence by professors like Eugene Fama and Kenneth French, who showed that large cap value stocks outperform their growth peers by 2.7 percentage points over a 79-year time frame.

But what if I said that you could do even better than that? Here's my secret: Read all the interviews you can of famous value investors, and when their enthusiasm bounces off the pages, listen up. 

You see, value investors are a pretty crusty bunch -- even rarer than a glimpse of the elusive double mullet is an excited value investor. Most of the time, value folks complain that the market is overvalued, and even when valuations become reasonable, they just pipe down and go about their business. Very, very rarely do they jump out of bathtubs like Archimedes and scream to the world how excited they are. So when this does happen, pay attention; it might be your chance to sow the seeds of a remarkable fortune.

You can't help but go nuts
That brings me to a recent interview with renowned value investing thinker Bruce Greenwald, author of Value Investing and professor at Columbia Business School. Greenwald is widely known for his intellectual contributions to the field, and he's the preeminent professor at the school where Benjamin Graham taught, and whose graduates include Warren Buffett, Walter Schloss, and Michael Price. 

So we should listen when he says:

I'll tell you the one really nice reason to be a value investor: When things like this happen, you cannot help but go nuts at the opportunity. What this looks like is the end of 1974, where good stocks are selling at three times sustainable earnings and stocks that normally wouldn't have sold at less than 20 times earnings are selling at 10 times earnings.

Wow, wow, and wow. It's one thing for one of the world's brightest value minds to be excited about the market, and it's an entirely different (and better) thing for one of the world's brightest value minds to be really excited about the market. 

How to profit
At a recent visit to Fool HQ, Greenwald told us that stocks are cheap right now, but you need to buy the right ones. His advice is to make sure the stock is backed up by hard assets that will retain their worth. We're not talking about buying banks like Bank of America (NYSE: BAC  ) or Goldman Sachs (NYSE: GS  ) , whose loans can go up in smoke, but companies like Boeing (NYSE: BA  ) or Johnson & Johnson (NYSE: JNJ  ) , which own factories whose products will be in demand for years.

You also want to buy companies with strong long term prospects that are trading cheaply relative to their normalized earnings (earnings adjusted for economic cycles) so that you get a good deal for the company's post-recession earnings.

So look for stocks with:

  • A valuation at a low multiple of normalized earnings (12 times or lower)
  • Attractive long term prospects
  • Tangible, high-quality assets

Three intriguing value ideas
Here are three stocks that pass those tests and enjoy high ratings by our 125,000-member Motley Fool CAPS investing community:

Company Name

Market Capitalization

CAPS Rating (out of 5)

Price-to-Normalized Earnings*

3-Year Annual Earnings per Share Growth

3M (NYSE: MMM  )

36.3 billion

*****

10

7%

Goodrich (NYSE: GR  )

5.0 billion

*****

10

40%

Genesis Lease (NYSE: GLS  )

124 million

****

5

20%

Data from Motley Fool CAPS and Capital IQ, a division of Standard & Poor's.*Author’s calculations.

3M is so diverse, and its growth is likely to be close to GDP, but people won't stop buying Scotch tape, face masks, or road signs tomorrow. While growth might not be fast, its assets should retain their value, and the company should continue to maintain margins in its core businesses. 

Goodrich supplies the aerospace and defense markets with a wide range of products, including wheels and brakes and engine components. Like 3M, it has very strong competitive positions (it's typically one of only a few suppliers for a particular product) and a cheap price based on my normalized earnings estimate. Its assets are very tangible -- you can't make a 737's landing gear out of thin air! 

Finally, we have Genesis Lease, a company that owns 54 airplanes and leases them to airlines. There is a long-term trend toward airlines leasing planes rather than buying them, yet because of the credit crunch and fears of an aviation downturn, this company trades at only 0.2 times book value. Talk about a mispriced company -- the strength of the companys assets warrants much, much more than that meager multiple. In fact, this is one of the most mispriced stocks I have seen in my entire career. 

Quite frankly, I'm going nuts at these kinds of opportunities -- solid companies with excellent prospects and tangible assets that won't disappear any time soon. Yet the market is valuing them at almost absurdly low levels. 

These are the kind of opportunities that can make you bags of money, and they are precisely what we look for at the Motley Fool Inside Value newsletter service. You can see our five best ideas today with a 30-day free guest pass.

Click here for more information.

Andrew Sullivan owns shares of Genesis Lease. Johnson & Johnson is an Income Investor recommendation. 3M is an Inside Valueselection. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 10, 2009, at 9:29 PM, trenton1ryan wrote:

    You posted the exact same thing after another article.

    Sounds like a pump to me.

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