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 over 60% since last March, which is typically consistent with a market flooded with uncontrolled euphoria. Sure enough, many are preaching of an overvalued market that's gotten way ahead of itself.

Stand back
And maybe they're right. Sooner or later, they probably will be. But perspective is in order: When stocks bottomed out last year, a better part of the investment community thought the world was about to explode. Companies like Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) traded for trivial valuations because, quite literally, many thought they were about to go under.

Today, it looks like we've skirted most of those calamitous end-of-the-world threats. Thank heavens. 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 exuberance, 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 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

Return Since March 2009

Dollar Thrifty Automotive

3,321%

Avis Budget Group

2,555%

Dana Holdings

2,542%

Are these companies destined for greatness? Did they announce a new blockbuster product? Are they the next Apple (Nasdaq: AAPL  ) , waiting to change the way we live? Goodness, no. Not even close. Their huge gains are simply a reflection that they'll live to see another day.

In general, this is a rally built on canceling out past pessimism. 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 begin with. But this was hardly the case when the market bottomed in March. More importantly, some of the highest-quality companies in the world still trade at attractive prices.

Three in particular I like are Verizon (NYSE: VZ  ) , Campbell Soup (NYSE: CPB  ) , and Coca-Cola (NYSE: KO  ) .

And I'll tell you why.

Verizon has been hit over the past few weeks, pushing its dividend yield (the main reason you want to own this stock) up close to 7%. When interest rates are at zero and you can buy world-class utility stocks with 7% dividends, odds are you won't be unhappy down the road. Verizon could also score big if Apple drops the iPhone exclusivity contract with AT&T (NYSE: T  ) .

Campbell Soup has two things running in its favor right now: recession-shocked consumers looking to keep their costs down, and a stock trading at a cheap valuation. Shares currently trade hands at 12 times forward earnings -- a nice discount to the 20 times earnings shares have traded at on average since 1993.

Coke has long been a default pick of investors looking for a company they truly understand. But here's something many people don't know: There's increasing talk (including hints from Treasury Secretary Tim Geithner) that China could soon revalue its currency, letting the yuan appreciate against the dollar. That could make it cheaper for over a billion thirsty Chinese mouths to purchase one of America's most admired exportable goods: good ol' Coca-Cola. How much of this is baked into today's share price? At 15 times earnings, close to none of it, in my opinion.

Onward 
Perspective can be a powerful thing: Two years ago, Dow 10,000 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 last March's 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. To see what we're recommending today, click here for a free 30-day trial. There's no obligation to subscribe.

This article was published on June 25, 2009. It has been updated.

Fool contributor Morgan Housel owns shares of Verizon. Coca-Cola is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor selection. Coca-Cola is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.


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  • Report this Comment On February 09, 2010, at 7:07 PM, langco1 wrote:

    avis and budget are among the best shorts for 2010 while one time biggest hertz is now near bankruptcy due mainly to its poor hedge fund controlled management....

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