FOOL ON THE HILL
Sorry September

Several factors are weighing heavily on the markets this month: a struggling economy, the 9/11 anniversary, and a possible war with Iraq. Additionally, this has historically been the worst month for stocks. It's time to think like a contrarian, however, and look for good stocks that shortsighted investors have beaten down.

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By Rex Moore (TMF Orangeblood)
September 5, 2002

Wouldn't you know it? After all we've been through -- a sluggish domestic economy, fears of instability in Latin America, a scandal per week on Wall Street, and talk of a possible Village People reunion tour... all of which have contributed to one of the worst bear markets ever -- now we find out that history itself is working against us.

According to the Wall Street Journal, the month of September is historically the stock markets' worst. In fact, since 1900, the Dow Jones Industrial Average has lost an average of 1.09% during this month. And as the paper rightly points out, there are plenty of factors weighing on the markets this September, including the anniversary of 9/11 and rumblings of a war with Iraq. And, right on cue, the S&P 500 opened the month by plunging 4.2%, its worst drop since the day trading resumed after the terrorist attacks.

This is pretty scary stuff, if you think about it. I'm getting the same sort of feeling I did when I was nine years old and discovered where my parents kept the cookie jar money at home. I treated all my friends to Slurpees at 7-Eleven, and gave the leftover money to Ramona Bishop because I had a crush on her. My mom found out, shot me a cold glance, and uttered the seven dreaded words: "Just wait till your father gets home!" (None of this would've happened if they hadn't kept the money in the real cookie jar!)

Anyway, that's the feeling I have right now about the markets. Like I'm just waiting for my father to get home so we can get this whole thing over with. In the meantime, though, I'm not entirely helpless. Unlike my childhood days, there's actually something I can do to help make things better, once the bear has had its day.

Of course, what I can do is what I should always be doing. Constantly reviewing my own stocks, for instance, to make sure my reasons for owning them are still valid. And all the while looking for other interesting investments. In uncertain times, it can really pay to be a contrarian... looking hard at stocks others are selling.

One of the best examples I've heard of being a contrarian was about people buying real estate in downtown Beirut, Lebanon, when the seaside resort was under constant shelling several years ago. It's a beautiful city, and once things somewhat returned to normal, I'm sure landowners were sitting on spectacular gains. Those investors had the vision to look past short-term hardships and see the real value in an asset. As a result, I always put beaten-down companies on a watch list, so I can review them when I have time.

Of course, my watch list is more like scraps of paper with names on them strewn about. Just yesterday, I pulled out a tattered newspaper clipping that had been jostling around in the bottom of my briefcase since February, right next to the petrified M&Ms and the miniature mold colony. It's a story by one of my favorite financial columnists, the Washington Post's James K. Glassman, called Investing After 9/11. In the article, Glassman talked about three companies that had been hit hard following the attacks, but had not yet rebounded: aircraft maker Boeing (NYSE: BA), cruise-line operator Carnival Corp. (NYSE: CCL), and Starwood Hotels & Resorts (NYSE: HOT).

Those three -- each off their Sept. lows, but still down about 25% over the past year -- are next on my list for serious research. All three have been affected by the same downturn in travel, of course. But how long will the bad times last in that industry? When things do turn for the better, will these three be well positioned? If so, they may be attractively priced for someone with time on their side. As Glassman wrote, "Investors who have a long-term view (this means you!) benefit from the fact that so many other investors have a far shorter perspective."

There are plenty more possible turnaround plays out there. Our own Whitney Tilson wrote about two of them yesterday: E*Trade (NYSE: ET) and Gemstar (Nasdaq: GMSTE). Both are "complex, ugly stories," but Whitney sees them getting past their short-term problems.

Want another reason to keep your eyes open for bargains? For the first time since Sept. 11, company insiders are buying up stock in significant numbers. The Associated Press cites research by Market Profile Theorems that shows buyers outnumbered sellers by a two-to-one margin during the last part of August -- the first time buyers had the upper hand since early Oct. 2001.

This is certainly no sure sign of a turnaround; company insiders aren't always right, and some even make Dilbert comic strips look like a real-life documentary. Still, they wouldn't be buying unless they thought there were good reasons to do so, and their actions can only be viewed as positive.

Now, I should disclose here that I'm an optimist. Some folks see the cookie jar as half empty, but I can see the rolled-up wad of bills in it. I can't help but have a long-term, bullish outlook. This is still the strongest country in the world and the greatest economic system in existence. Bear markets will come, but bear markets will also go. I don't know exactly when it will happen, but the bull will be back -- sometime -- and this is the best time to prepare for his return.

So yes, this may be a rough September. Or it may not be. But it shouldn't really matter if you're like me -- a long-term investor who admits he can't time the market. You can time your entry into individual stocks. So stay patient, do your research, and look for solid companies whose fortunes will improve dramatically once things turn around. And if short-term-thinking investors are giving you a good price on them, buy.

Fool on, America. We'll get through this month together.

Rex Moore likes cookies. At time of publication, he owned shares of Gemstar and will be researching other companies mentioned here soon. You can view his holdings, and the Fool's disclosure policy, on this here Internet thingie.