Top Stocks to Buy Today

"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher

Despite the recent gains in the market, current economic data suggests we shouldn't expect a full recovery anytime too soon. So it may be fair to ask ourselves: How can we avoid the mistakes that got us here, and how can we find the top stocks to buy today?

Consider this
The mistakes that led to this downturn are reminiscent of the speculative frenzy known as the Dutch Tulip Craze. In 1636, Dutch citizens found themselves caught up in a tulip rampage, fueling skyrocketing orders and prices that grew by as much as 100% per week.

Eventually, one tulip bulb was selling for the equivalent of thousands of modern-day dollars! The market became overbought, and the frenzy bottomed. By 1637, the price of tulips was less than 1% of what it had been before the crash. Value was an afterthought to the tulip "day traders" who sought to profit from irrationally soaring prices.

Quickly fast-forward to the dot-com bust. The growth of Internet companies and an overinvestment in information technology caused the Nasdaq to rise more than 600% from 1994 to early 2000. If you were alive or breathing in the last 10 years, surely you remember what happened next:

  • In 18 short months, approximately $5 trillion was wiped out from the value of technology stocks.
  • Silicon Valley trendsetters like Adobe Systems (Nasdaq: ADBE  ) and NetApp (Nasdaq: NTAP  ) experienced price depreciations of more than 75%.

As with the tulips, it seemed as though everyone was confident in the price of the next "big" stock. The classic example of the overhyped company of the time was Pets.com. After trading for more than $14 per share, it liquidated in less than 270 days at $0.22 per share. Everyone supposedly knew the right price -- but what was the value?

OK, let's talk 2008
Call last year what you want. The housing horror. The derivative debacle. The commodity crisis. The securitization scare. There are too many explanations for the collapse to isolate only one aspect.

For the sake of argument, I'll arbitrarily choose crude oil to illustrate my point. The Commodity Futures Trading Commission recently announced it will release a report suggesting speculators played a role in driving last year's wild swings in oil prices, which spiked at $145 a barrel for crude in July before collapsing to $33 a barrel by December, representing a 77% decline in value over a six-month period.

Transocean (NYSE: RIG  ) and Noble (NYSE: NE  ) , two of the larger offshore drilling management and service providers, lost more than 65% of their value from July 2008 to November 2008 ... and have gone on to more than double along with the recent crude oil rally. I don't mean to sound repetitive here, but from these numbers, it appears that many investors didn't evaluate these companies' competitive positions, but were instead making bets on oil prices.

What, if anything, have we learned?
We can be certain that there will always be ups and downs, booms and busts, good years and bad. So what can we do? One philosophy is to invest in companies with great competitive advantages, clean balance sheets, and a history of success in their given industries.

For example, Open Table (Nasdaq: OPEN  ) , a restaurant reservation solution provider, has clearly emerged as a leader and innovator in its respective industry. With zero debt, healthy gross margins, and revenue growth of over 20%, investing in Open Table would certainly seem like a good idea. But at more than 60 times future earnings, does it provide you with much value today?

Similarly, you might be excited by the prospects for Las Vegas Sands' (NYSE: LVS  ) recent move into untapped Asian markets. It is currently building Marina Bay Sands, one of the first casinos in Singapore. In addition, it is one of a select few companies that has been given jurisdiction to build in the high growth market of Macau, China. Las Vegas Sands currently earns about 70% of its revenues outside the stagnant U.S. market, and with annualized gross profits of 22% over the last five years, it seems like it may be the one Vegas-based casino ready to emerge from the recession.

But it's trading at over 45 times future earnings and 2.8 times its book value. Does that provide value to someone buying shares today?

It's hard to know the answers. That's why we focus not only on exciting companies, but on ones that are exuding value, as well.

Here's a place to start
In both bear and bull markets, value investing has provided people with a logical and methodical approach to investing. The general ideas: Don't speculate on questionable growth potential or companies with debatable revenue streams. Look at companies that may be trading well below their intrinsic value for unfounded reasons, seem cheap compared with their industry, and have strong records of returning capital to their shareholders.

Here a just a few companies that fit the bill right now:

Company

% Below 12-Month High

Price-to-Earnings Ratio

Return on Equity

Danaos (NYSE: DAC  )

58%

2.8

21%

Cryolife

47%

5.4

27%

Sun Health Care Group

33%

3.4

26%

Data from Motley Fool CAPS.

Granted, in some cases these companies' P/Es are artificially low based on last year's higher earnings. But even if earnings decline, they're still cheap.

More ideas
Our Motley Fool Inside Value team seeks out companies that not only have great competitive advantage and growth opportunities (Open Table and Las Vegas Sands, for example), but that also trade at bargain prices. If you're looking for more cheap stock ideas, you can click here for a free stock report.

Fool contributor Jordan DiPietro doesn't own any of the shares mentioned above. OpenTable is a Motley Fool Rule Breakers pick. Adobe Systems is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy recently redeemed its change jar and made $87. Now that's value.


Read/Post Comments (8) | Recommend This Article (13)

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 November 24, 2009, at 4:18 PM, spokanimal wrote:

    Whoooaahhh, hold on there, Jordan...

    I see you're guaging Las Vegas Sands by the 2 most opportunistic metrics by which to SLAM the company... future earnings and book value???

    First of all, EBITDA or cash flow are better metrics by which to guage a depreciation-intensive company like LVS and these are metrics which are improving nicely. Given the trajectory of Macau revenues, the Marina Bay opening slated for February and the forward group booking guidance the company has ready so far for 2010, the projected, company-wide EPS becomes extremely mis-leading by comparison.

    And book value? How close to market or replacement value do you think book value is in the case of LVS? We're not talking Dow Chemical here, Jordan... it would cost twice the Venetian Macau's book value to replace it today and once Cotai builds up, it's market value would be double that.

    Just look at the implied value of the 25% of Macau assets that were spun off in the Hong Kong IPO (over $10 bil) and you can see how worthless your book value analogy is to correctly valuing this company.

    So please, stop misleading people by playing fast and loose with numbers.

    Spokanimal

  • Report this Comment On November 25, 2009, at 12:04 AM, nonidiomatic wrote:

    If you are looking for a 3-bagger or better, DAC is the only one on this list that has that kind of potential.

  • Report this Comment On November 25, 2009, at 12:14 AM, TMFPhillyDot wrote:

    @spokanimal,

    I agree with you that they are not necessarily the best metrics for LVS; however, I was not trying to mislead people, rather I was trying to gauge their feelings on whether or not LVS exuded value at today's prices. You obviously feel their price is fair.

    However, I would point out that although free cash has improved, it is still substantially negative, and EBITDA has actually not improved like you said; year-over-year it has declined by 8%.

    Thanks for your comments and feedback,

    -Jordan(TMFPhillyDot)

  • Report this Comment On November 25, 2009, at 11:39 AM, spokanimal wrote:

    @ Jordan,

    Thank you for your reply but sir, you're doing it again.

    If you can think of a time over the last 5 to 10 years when the best representation of EBITDA comparisions would be sequential comparisons rather than year-over-year comparisons, what period of time do you think that a sequential comparison would offer up the best representation of a company's future fortune?

    If you answered Q2 and Q3 of 2009, you get a gold star, sir.

    What was going on in Macau and Vegas in July and August of 2008? Lots! Total Macau gaming revenues in both july and august of 2008 easily exceeded 9 billion patacas... revenue levels that were not achieved again, with the sole exception of last march, until july of THIS year. Year-over-year Vegas business is HORRIBLE, but recent month-over-month trends signify something quite different.

    Further, Q3 EBITDA gains at sands macau were extraordinary and for Q4, the company reported being on track for another double-digit percentage EBITDA gain over Q3 in the SAR.

    So thanks for your YOY number there, Jordan, but it's a rear-view mirror mis-representation of what investors really need to guage this company's value and has absolutely nothing to do with the realities of today.

    Spokanimal

  • Report this Comment On November 25, 2009, at 12:53 PM, stockpicks4me wrote:

    what do you expect from motley fool as they are MPEL pumpers and never tell the facts..

  • Report this Comment On November 25, 2009, at 12:59 PM, Senescent wrote:

    I have to agree with Spokanimal. Any time a company is completing a massive building program as LVS is, many accounting metrics will be totally worthless. Let's add in a few more facts.

    LVS Macao has over 1,000 gaming tables - each of which is generating a gross win of close to $2,000,000 per year (read that again - it's true). When the company completes its building program it will have 5,000 gaming tables in Macao. And those tables will get filled by Chineses gamblers - if China's GDP continues growing at 8%/year, the gamblers that are in the tip of the income iceberg will grow at 18%/year (simple demographics) - that's a doubling every 4 years.

    Now where will you see any of that in your rear-view mirror?

    Then we have Singapore and a Las Vegas recovery. (Disclosure - I am decidely LONG this stock)

  • Report this Comment On November 25, 2009, at 1:11 PM, Senescent wrote:

    Here's some more information you won't see by looking in your accounting rear-view mirror.

    LVS Macao has over 1,000 gaming tables with a per table annual gross win approaching $2,000,000 (not a typo). The company has the funding to complete its build-out of Macao (Cotai Strip) and grow to 5,000 tables. With Chinese GNP growing at 8%/year the gamblers in the tip of the income iceberg will grow at 18%/year - or double every 4 years. All that is invisible in the dumb accounting metrics and none of that includes any reliance on Singapore or recovery in Las Vegas

  • Report this Comment On November 25, 2009, at 1:43 PM, stockpicks4me wrote:

    excellent reply seems as they very really mention MBS and beth..mbs will be a gold mine as they have already leased out 80% of the retail space and have booked quite a few company's for MICE but they never mention that...they are underestimating MBS big time and beth...they need to do their homework on beth if you look at the last 2-3 weeks at beth they are coming in second in revenue now that they have their marketing and buses going strong. once beth gets table games which has already been approved look out...

    GL

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