Bargain Stocks Are Everywhere

Bet against the masses. Don't be the lemming. Be fearful when others are greedy.

Follow these simple rules, and you'll probably be a successful investor.

With those rules of thumb in mind, you'd be forgiven for thinking now is a terrible time to buy stocks. The S&P 500 is up more than 30% over the past three months or so, which is typically consistent with a market flooded with unrestrained optimism. Sure enough, some investors are preaching of an overvalued market that's gotten way ahead of itself.

Oh really?
And maybe they're right. But perspective is in order: When stocks bottomed out in early March, a better part of the investment community thought the world was about to explode. Companies like Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) traded for trivial valuations because, quite literally, their deaths looked imminent.  

Today, it looks like we've skirted most of those calamitous end-of-the-world threats. It's still terrible, mind you, just not as terrible as many thought. Naturally, stocks have sprung back to levels that reflect a deep recession, rather than a total Mad Max scenario.

This is an incredibly important distinction to make: Markets haven't risen to levels reflective of future optimism, but to levels consistent with a world that isn't about to fall into mass insolvency.

This is evident by looking at the biggest winners over the past few months. By and large, the stocks that have risen the most are ones you wouldn't recommend to your worst enemy. Have a look:

Company

3-Month Return

2009 EPS Estimates

Dollar Thrifty Automotive

756%

($0.85)

Avis Budget Group

430%

($0.66)

ArvinMeritor

188%

($1.24)

Data from Yahoo! Finance and Google Finance.

Are these companies destined for greatness? Did they announce a new blockbuster product? Are they the next Google (Nasdaq: GOOG  ) , revolutionizing the way we access information in our everyday lives? Goodness, no. Not even close. Their huge gains are simply a reflection that they'll live to see another day.

This is a rally built on canceling out past pessimism, not pricing in future optimism. The biggest gains have been concentrated in very low-quality companies that are simply being given a second shot at life.

Not all gains are created equal
The idea that a stock is overvalued after a massive run-up is contingent on the idea that it was properly priced to being with. But this was hardly the case when the market bottomed in March. More importantly, some of the highest-quality companies in the world have largely been left out of the rally and still trade at attractive prices.

Here are three in particular:

Company

3-Month Return

Forward P/E Ratio (FY 2009)

Berkshire Hathaway (NYSE: BRK-A  )

(1.9%)

16.0

Procter & Gamble (NYSE: PG  )

8.3%

13.2

Altria (NYSE: MO  )

(0.4%)

9.5

Data from Yahoo! Finance.

What's to like about these three? Glad you asked:   

  • We gab about the awesomeness of Warren Buffett enough here at the Fool, so I won't bore you with warm and fuzzy stories. I'll just give you the numbers: Over the past 15 years, Berkshire Hathaway has traded for an average of 1.91 times book value; today it trades for 1.30 times book value. I find that very intriguing, and think you should, too.
  • Whether you know it or not, you probably use several Procter & Gamble products. Its strong brands -- which range from Gillette to Cascade to Tide -- are in your bathroom, kitchen, and laundry room. Since 1994, P&G shares have traded at an average of more than 26 times earnings. Today, you can pick them up for 13 times earnings. That's the kind of opportunity that makes investing in recessions such a blast.  
  • Altria -- maker of Marlboro cigarettes -- is a staggeringly simple business that generates huge amounts of cash. Investors are nervous about new regulations that put tobacco under the watch of the Food and Drug Administration and restrict tobacco advertising. But oddly enough, the new regulations may actually benefit Altria substantially. Limits on tobacco advertising make it harder for other cigarette makers to challenge Altria’s dominant market share. This would be a huge moat that few other businesses have -- the government is, in effect, limiting competition. If you're looking for international diversification, global sibling Philip Morris International (NYSE: PM  ) offers a lower yield but more growth opportunity.

Onward
Perspective can be a powerful thing: One year ago, Dow 8,500 would have been associated with the end of the world. Today, some want to treat it like it symbolizes irrational exuberance simply because we've bounced so far off the March lows. This is inherently flawed thinking. Focusing on a stock's percentage change over a short period of time is utterly meaningless. Drilling down on a company's intrinsic value and buying bargains like we haven't seen in decades is what's important.

And that's why our Motley Fool Inside Value team of analysts is having a field day digging through the rubble and finding cheap stocks like never before. If you’d like to see what they're recommending right now, click here to try the service free for 30 days. There's no obligation to subscribe.

Fool contributor Morgan Housel owns shares of Berkshire, Altria, Procter & Gamble, and Philip Morris International. Google is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway is both a Motley Fool Stock Advisor and Motley Fool Inside Value pick. Procter & Gamble is a Motley Fool Income Investor recommendation. Philip Morris International is a Motley Fool Global Gains pick. The Fool owns shares of Procter & Gamble and Berkshire Hathaway and has a disclosurepolicy.


Read/Post Comments (26) | Recommend This Article (286)

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 June 25, 2009, at 6:05 PM, JakilaTheHun wrote:

    Great article. I'm in agreement. In fact, I've continually sought out companies that were overvalued over the past few months and I've been able to find very few. So many companies were priced at ridiculous levels that simply did not mesh with reality.

    That said, I think there are much better bargains out there than BRK.B, PG, and MO. Those are all safety stocks. I think they work well if you want a low maintenance, buy-and-hold-for-10-years portfolio, but maybe not if you're willing to be a bit more active.

    I think if you're looking for relative safety with a strong possibility of large gains in the future, Progressive (PGR), Callaway (ELY), and Lexmark (LXK) might be names to look at.

    If you want bigger gains, are willing to take on more risk, but would still like quality companies, I think Western Refining (WNR), Lexington Realty Trust (LXP), and SkyWest (SKYW) are some good options.

    [I own shares of LXP just for the record, but not any of the others, unfortunately]

  • Report this Comment On June 25, 2009, at 9:04 PM, ElCid16 wrote:

    Jakila, considering that you like WNR, how do you feel about VLO? A week ago everyone was throwing them under the bus for their stock offering...

  • Report this Comment On June 25, 2009, at 10:48 PM, JakilaTheHun wrote:

    dkilgour16, nearly all the refiners are cheap right now. I happen to like WNR better than VLO at current prices, however. Just feel as if they have a better track record. That said, I think VLO is probably a good bet long-term at the current levels.

  • Report this Comment On June 26, 2009, at 1:46 AM, exseries7 wrote:

    Agree that it is getting more difficult to find bargains. After I have recently experienced big gains in oil/gas,

    mining, Ag, defense etc, I yesterday bought a couple of dry bulk shipping micro caps that are very cheap (and risky): SBLK and OCNF. This market segment has been hard hit but should recover when BRIC countries start importing what these ships can carry.

  • Report this Comment On June 26, 2009, at 10:17 AM, RCOPKS wrote:

    What would be wrong with buying Fannie Mae and Freddie Mac in the .60 range? Seems that they are likely to go back at least half way when the real estate market turns.

  • Report this Comment On June 26, 2009, at 11:35 AM, MyDonkey wrote:

    Currently, 7831 CAPS raters (96.6 percent) think Altria will outperform the market. If you really wanted to "Bet against the masses. Don't be the lemming. Be fearful when others are greedy.", you would short Altria.

    The same is true of most other company ratings at The Fool: off the top of my head I'd guess that over 75 percent of all companies have a favorable Outperform CAPS rating (and often by a very wide margin, as in Altria's case). Are there actual stats available?

    By definition, about half of all companies will outperform the market, and about half will underperform, so why is there such a warped sense of performance among MF folk?

  • Report this Comment On June 26, 2009, at 11:53 AM, TMFDiogenes wrote:

    MyDonkey,

    In general, people tend to be more interested in following companies they like, rather than those they don't. I suspect that's the reason why most ratings are outperform. That's why we have a star system, that ranks stocks by quiltiles. Star ratings or All-Star outperform to underperform is probably a more useful metric than overall outperform versus underperform.

    The theoretical reason why a stock's high star rating isn't just a follow-the-herd phenomenon is that the formula that ranks stocks is based on each player's performance -- so the higher performing players have more influence on a stock's rating.

    Thanks for posting,

    Ilan

  • Report this Comment On June 26, 2009, at 12:01 PM, maplewoodman wrote:

    While I am careful to put my retirement as a higher priority than being ethically snow-white, I for one will not make money from the deaths of others. I stay away from cigarette giants - especially those that change their name to avoid obvious, negative connotations (please don't give me that stale argument about having Atria products in my house) . There are more 3800 listings on the NYSE alone - who needs legalized addiction suppliers?

  • Report this Comment On June 26, 2009, at 12:52 PM, BigOlDave wrote:

    If I asked an old guy on a park bench to give me some stock picks in a "value" category, I suspect he'd list these. Why pay for such advise from TMF?

    You must have something for "insiders". I've seen nothing from what is offered to the general public.

    And I think those folks who take free trials just to tune up their own research are dishonest.

    Maybe that's why my TMF rating sits at a modest 80. Unfortunately, I actually invest real money in all my picks.

    Dave

  • Report this Comment On July 01, 2009, at 2:40 PM, plange01 wrote:

    dollar thirfty and avis have done well and are now just coming into their best season.these companys downsized their fleets and now have a lot more pricing power.as these stock rose so did their rates that are nearly double and the demand is there.on the other hand poorly run hedge fund controlled hertz added huge amounts of debt,kept fleets higher and diluted their stock price with a large new offering....

  • Report this Comment On July 03, 2009, at 12:47 PM, freddyv3 wrote:

    Was this written by Jim Cramer, master of bad timing?

    This is perhaps the worst article I have read in some time because it completely ignores the macro economic data as well as historical trends, all of which suggest the stock market and economy is in a reavaluation phase that may last for a decade or two.

    You can listen to the smartest people out there, the ones who saw all of this coming, and you will hear that same theme. Or you can listen to the shills who have a TV show or blog and need to keep you bullish and you will hear all about how green shoots are popping up left and right.

    This message will self-destruct in ten...nine...eight...seven....

  • Report this Comment On July 03, 2009, at 6:23 PM, medixbio wrote:

    The one I like most going forward is Thermogenesis(KOOL), could be a 5 baggers in 12 months...Just the best hidden gem.

  • Report this Comment On July 04, 2009, at 12:23 AM, mariocavolo wrote:

    I'm sorry to be pessimistic, but actually I'm think its being more of a realist and so I have to agree with freddyv3.....my huge problem is the suggestion that PE ratios are suddenly reasonable again....UM WHAT?? Suddenly the new PE ratio is the FORWARD PE ratio, that's adorable....the PE ratio of the S& P 500 is hovering somewhere around FORTY in truth and it saddens me to find MF and other pundits suggesting all is so much rosier than we thought....the macro economic fundamentals are a disaster far from being able to justify current valuations...the govt with GS and others have obviously been propping up the trading desks falsely pushing these prices up and forcing the suckers to jump on board....that's all this rally is. The best way to illustrate is to point out the obvious Something falls from 10 to 5, then it goes up 10% WOW...its still at 5.5 folks...Americans in particular have been given the royal you know what and are in for a rude awakening in the decline of the quality of their lifestyle for the next 5-10 years. There 's too much solid information out there indicating a deflationary scenario to come....Cheers to the new normal...

  • Report this Comment On July 04, 2009, at 5:51 AM, deckx wrote:

    I keep hearing about green shoots,

    Must be somethinig to do with "argriculture" stocks ?? John Deere make good tractors so should be a safe bet ??

  • Report this Comment On July 05, 2009, at 11:24 AM, WishToRetire2 wrote:

    I'm struck by just what a formidable conundrum the current market is. It's impossible to make a bet as to what to expect from it over the next several years. It might be a secular bear because of the poor economic conditions. It might be a secular bull because of the 13 year lows we've reached. It's neither. It seems to be a secular guessing game. What to do. What to do? I'm just looking to retire and eek out a return that beats inflation by a little bit. But I can't seem to do it.

  • Report this Comment On July 09, 2009, at 7:41 PM, BIGVID wrote:

    Thank you for some of the advice in your comments. I am new to the stock market and have had luck with Ford (F), Profile Technologies (PRTK.OB), and Bennett Environmental (BEVFF.PK). I am going to look at VLO. This stock looks very promising. But being new, I am trying to avoid high risk. Thank you for your help.

  • Report this Comment On July 10, 2009, at 11:07 PM, slpca wrote:

    I'm with maplewoodman; I've seen relatives die from lung cancer and emphysema, and there is no way I would support tobacco products. While I appreciate financial advice from the Fool, I'd like to see more social conscience.

  • Report this Comment On July 21, 2009, at 1:07 PM, rotordad80 wrote:

    I've been retired for 15 years and have had mutual funds for 40 years or so. Never was able to make much money using a broker and the downturns we've had sure didn't help. I'm new to looking after my own account and want to say I appreciate reading all the postings. They are a big help in the learning process.

  • Report this Comment On July 27, 2009, at 5:39 PM, hardlyinterested wrote:

    Really people, Altria did not kill your relatives and friends, they smoked themselves to death. Americans need to grow up and quit blaming others for their weaknessess. I'm an ex-smoker and I own Altria. I don't suppose you guys have any overweight friend and relatives. Who are you going to blame their deaths on???

  • Report this Comment On July 27, 2009, at 5:42 PM, hardlyinterested wrote:

    BTW Thank you to those of you who actually post constructive information and stock suggestions!!!

  • Report this Comment On July 29, 2009, at 2:32 PM, jimsommer101 wrote:

    I'm with hardlyinterested. An EX-smoker that owns MO If you haven't figured it out it's every man for himself.

  • Report this Comment On August 01, 2009, at 4:47 AM, publishingq1 wrote:

    Gold Stocks...... The New Buzz....I've never been a gold bug but thats starting to change. I made fun of them for years. I now am betting more and more on gold stocks lately. It all just makes so much sense http://tinyurl.com/cheap-gold-now

  • Report this Comment On August 13, 2009, at 12:06 PM, vintagemoto wrote:

    Let me get this right, we shouldn't own any stock that makes products that can harm us. We Americans are no longer responsible for ourselves. I'm avoiding cheese makers,pork producers, salt companies,oil companies, pharmaceuticals,chemicals, car companies,archery/firearms equipment firms ,cell phone manufacturers,ATV companies,video game makers,power tool makers and candy companies.

  • Report this Comment On August 14, 2009, at 2:18 PM, SWEAT7 wrote:

    These blogs are all over here and fore back and forth.. not just in MF but on many different pages. Everybody.. well almost everybody feels the same uneasiness of what ax will fall next. Folks are surmising the end of a secular bear run and the beginning of another major decline.. or a better term, retraction. But alas, some are toting the hope for newer brighter market futures, one with some moxy and the ability to run awhile yet. The truth is IMO , if you haven't the stomach for the volatility, pull out. I also sense a decline is coming. I am just trying to not turn the corner quite yet as I think we still have a little wiggle room. The Bulls are not ready to roll over, close, but not today.

    Oh and by the way, MO sell what consumers are willing to buy..my mom is a COPD,CHF, Emphy patient by here own admission and it was her choice, her vice. I like MO. I also still own DEO and I have lost loved ones to liver cancer. My point... guns don't kill people , people kill people.

  • Report this Comment On August 26, 2009, at 4:46 PM, createyourfate wrote:

    perhaps you should also look into SNRY (Solar Energy Initiatives)....positioning themselves for major growth.

    Thank you to those posting their stock suggestions.

  • Report this Comment On December 23, 2009, at 2:52 PM, globalsailor wrote:

    @hardlyinterested: It's nice to know that you own a part of a business that does good things for people. Also, as a shareholder, it is your fault if they encourage people to do bad things.

    All of that said I think we need to take a more international approach to investing ethics. For example, child labor has been commonplace throughout most of the world for thousands of years. Illiterate kids in large families need to eat too.

    The question is, do you find that your company provides a useful service or just noise? I personally don't invest in entertainment companies because I believe the best entertainment is free. Also, most of the high priced stuff isn't worth it.

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