Of all of the insight I've heard over these crazy months, the most telling came from an investor who appeared on CNBC last fall and, being entirely serious, advised, "There're only two positions to be in right now: cash, and fetal."
I get it. Even with the recent rally, it's ugly out there. Many companies that overleveraged their balance sheets are permanently impaired and will probably never fully rebound. Exploding banks come to mind. We had an unprecedented boom; now we're in the middle of an unprecedented bust. That's how markets work.
Even so, history tells us time and time again that market panics and forced sell-offs indiscriminately throw the good out with the bad. Amid the frenzy over financial markets and the "sell-now-ask-questions-later" mood of global investors, opportunities are being created for bargain-hunting investors like we haven't seen in decades.
Using the wisdom of our 135,000-member-strong CAPS community, I've hunted down a few dirt cheap, high-quality companies. Have a look:
|
Company
|
Recent Share Price
|
Forward Price-to-Earnings Ratio
|
5-Year
Expected Growth Rate
|
Trailing-12-Month Return on Equity
|
Dividend Yield
|
CAPS Rating
(out of 5)
|
|
Amtrust Financial Services (Nasdaq: AFSI )
|
$11.76
|
5.0
|
12.0%
|
21.3%
|
1.7%
|
*****
|
|
Pfizer (NYSE: PFE )
|
$15.26
|
6.7
|
0.0%
|
12.5%
|
4.2%
|
****
|
|
Garmin (Nasdaq: GRMN )
|
$24.16
|
11.9
|
12.1%
|
26.8%
|
3.2%
|
****
|
Data from Yahoo! Finance and Motley Fool CAPS, as of June 29.
Let's break down the bullish argument for each one.
You'll know cheap when you see it
Amtrust is the epitome of what investors should be looking for in this market: a great company in an out-of-favor industry trading at a bargain-basement price. This property and casualty insurance company currently trades at around five times forward earnings estimates.
Better yet, this is one of the most efficiently managed companies in the business. At the end of 2008, Amtrust had a combined ratio of 74.4%, compared with a current industrywide average of just over 100%. The combined ratio measures an insurance company's profitability by adding together the claims ratio and expense ratio. The lower, the better, with anything below 100% implying underwriting profitability.
As far as future growth prospects, here's what CAPS All-Star cdempsey1221 wrote in June 2008:
Amtrust is actually a phenomenal [property and casualty] company, and also has a knack for making incredible shrewd acquisitions of other p&c companies. They may have some debt, but they have plenty of cash to cover their debt; they're metrics for measuring the success of their underwriting are almost outstanding for this typical low margin industry. … If they can continue to structure their [acquisitions] correctly; hold their [underwriting] standards in place; and grow organically, you will see some great growth in earnings from this company.
Their fear, your profit
Pfizer is another example of a high-quality business in an industry everyone wants to hate. Just like UnitedHealth Group (NYSE: UNH ) and Merck (NYSE: MRK ) , Pfizer is stuck in a rut full of investors who are worried witless about nationalized health care. These fears may be legitimate (although overblown, I feel), but they've bludgeoned Pfizer's shares down to a level that equates to a 4.2% dividend yield. The bad news is being priced in, such that brave investors can substantially cash in on others' fear. Here's what CAPS All-Star ACMIP recently wrote: "Considering the large FCF yield and the quality of their business, investors should earn outstanding risk-adjusted returns over the next few years as the market awards Pfizer with a more appropriate valuation."
Still searching for direction
Everyone knows the story about GPS maker Garmin: Innovation from Apple (Nasdaq: AAPL ) and Research In Motion (Nasdaq: RIMM ) has pretty much zapped its relevance. No one wants to carry a clunky module that performs the same function as your iPhone.
This is true … to a point.
Creative destruction has indeed dented Garmin. But increased competition isn't a lethal development for this company, if only for one reason: There's still a market for larger, more reliable, semi-fixed products, particularly in automobiles, where Garmin is king.
Furthermore, and perhaps most importantly, is Garmin's exceptional capitalization. With no debt and more than $4.60 per share in cash, the company is well equipped to weather the storm. When you back out the cash from the current share price, you get to something like 10 times forward earnings -- pretty cheap, just about any way you spin it.
Your turn to chime in
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