One Value Stock to Buy Right Now

There’s no doubt that we saw a great market rebound in 2009. Spurred by government spending, increased access to capital, and earnings recoveries, the S&P 500 surged ahead with an overall gain of 65% from the March bottom. Companies like Priceline.com (Nasdaq: PCLN  ) and STEC (Nasdaq: STEC  ) saw 100%-plus gains.

In the first 19 days of January, the Dow Jones Industrial Average gained about 200 points. Despite some clouds on the horizon, many bulls began to claim victory. Investors were ready to put the subprime debacle in the rearview mirror, once and for all.

And then in late January, over a three-day period, the Dow lost more than 550 points. Over the next two days, the VIX, which measures volatility, jumped by 46%.

In a matter of days, Wall Street went from “How high can the market go?” to “Is this the start of a major correction?”

Now, just a month later, the bulls are back in full force on the back of a surging Dow.

It's really not that simple
Despite the optimism, however, many stocks are not seeing the pop.

In the most recent round of earnings reports, many companies reported positive results, beat analyst expectations, and got slammed immediately after. Here are just a few:

Stock

Price Before Earnings

Price After Earnings

Percentage Change

MasterCard (NYSE: MA  )

$247.58

$222.11

(10.3%)

American Express (NYSE: AXP  )

$42.16

$38.59

(8.5%)

Goldman Sachs (NYSE: GS  )

$167.79

$160.51

(4.3%)

Google

$582.98

$550.01

(5.6%)

Value taking off
That doesn't mean there's no upside from here. Hasbro (NYSE: HAS  ) , for instance, soared 13% in one day on the back of strong earnings and has continued to go up from there.

The obvious question is this: Which stocks are likely to take off in a way that will reap the most benefits for you and your portfolio?

With a massive federal deficit, high unemployment, and pending legislation that could affect everything from health care to financial reform, the market is likely to see continuing volatility.

Instability in the market and the ensuing fear consuming investors means that many well-run, successful companies have seen their share prices battered down. This gives value investors the ultimate opportunity to prey on stocks that are trading at unjustly low prices.

During recessions, value stocks tend to underperform the market. However, on average, for the 12 months following a recession, value stocks outperform growth stocks by 19.3% -- and the recession most likely ended sometime this past summer.

We're already seeing some proof. Year-to-date, value stocks have already outperformed their growth brethren by more than one percentage point. As 2010 continues and unpredictability unfolds, you're bound to find more and more opportunities to grab great stocks at mind-bogglingly low prices.

Digging out diamonds
So how do you separate out the likely winners?

One way is to screen for companies with low price-to-earnings ratios and price-to-book values lower than 1. Once you find a company that you think is undervalued, make sure it has all of the fundamentals in place -- a manageable debt-to-equity ratio, positive free cash flow, and a return on equity north of 10%. If you’re able to find these traits plus a business model you can understand, you may have just found yourself a winner.

In fact, the Motley Fool Inside Value team recently recommended Thermo Fisher Scientific (NYSE: TMO  ) , a company they think is undervalued by more than 30%. A leader in its industry, Thermo Fisher provides laboratory equipment for more than 350,000 customers involved with drug discovery and medical research. With free cash flow exceeding net income, Thermo Fisher has enormous upside potential -- making this one stock you need to consider buying right now.

If you agree that the market’s shakiness will breed more great deals, consider taking a 30-day free trial of Inside Value. You’ll get an all-access pass to see all of our past and present recommendations, including when to buy and when to sell. Click here to get started -- there's no obligation to subscribe.

Already a subscriber? Log in at the top of this page.

Fool contributor Jordan DiPietro owns shares of Hasbro. American Express and Thermo Fisher Scientific are both Motley Fool Inside Value choices. Google is a Rule Breakers selection. Hasbro and priceline.com are Stock Advisor recommendations. The Fool owns shares of Hasbro. The Fool's disclosure policy recently found 50% off bottles of wine, and it thought that was good!


Read/Post Comments (2) | Recommend This Article (41)

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 March 05, 2010, at 3:29 AM, Laustcozz wrote:

    I don't get it. TMO has a P/B greater than 1...and are you saying a P/E of 24 is low?

  • Report this Comment On March 05, 2010, at 7:33 AM, TMFPhillyDot wrote:

    @Laustcozz,

    Thanks for the comment.

    Their P/E is artificially high b/c of depreciation/amortization expenses due to an earlier acquisition. When adjusting for that the P/E becomes a much more reasonable 15.

    However, still, TMO is not necessarily your typical value stock (b/c of a higher P/B and middle ground P/E). What creates such tremendous value is the margin of safety at which you can purchase the stock right now, according to the models of Inside Value.

    Best,

    Jordan (TMFPhillyDot)

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