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3 Cheers for a Bear

http://www.fool.com/investing/value/2005/11/28/3-cheers-for-a-bear.aspx

Jim Gillies
November 28, 2005

I have a confession to make: I sometimes cheer a good crash. In fact, if it's a really big blow up, I often revel in the destruction. No, I'm not talking about highway mishaps here. I'm talking stocks.

In Berkshire Hathaway's 1997 chairman's letter, Warren Buffett wrote:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? ...

Even though they are going to be net buyers of stocks for many years to come, [many people] are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

Buffett's wisdom is the secret of successful value investors from Benjamin Graham to Bill Ruane and is also the heart of Philip Durell's Motley Fool Inside Value newsletter, where we seek to buy the proverbial dollar for 75 cents. Yet, so many, myself included, often forget this crucial strategy at the first hint of a swoon.

In that vein, here are three examples of why you should cheer as the fire rages.

Cheer your wish list down
You've found a company you'd love to own, but your analysis tells you it's expensive. What do you do? Buy it anyway or wait?

If you said, "Buy it anyway," you've just made the mistake of confusing a great business with a great stock. Valuation matters. Just ask the investors in bubble-era titans such as Intel (Nasdaq: INTC  ) or Dell (Nasdaq: DELL  ) .

What if you come across that same company hitting new daily lows? What if, after due diligence, you find improving operations and financials and a stock trading at ever more compelling levels? Well, if you're like me, you start to cheer that dog down! I'm not unfeeling; I realize there are thousands of shareholders likely sitting white-knuckled, willing the stock to cease tumbling. But I just don't care. (OK, perhaps I'm a little unfeeling.) I care about what I pay for a company, and I like bargains.

Wishing for lower lows
A recent example is Wal-Mart (NYSE: WMT  ) . The company hit my watch list in mid-April after I realized that the stock was a third off its high at the start of the millennium. Then, as story after story began appearing about weak retail sales and the beleaguered consumer, the uncertainty-hating market drove the shares down further (and I got out my cheerleading pom-poms ... um, I mean my bullhorn).

You see, stock price aside, Wal-Mart has been executing on nearly every front. Annual revenue growth of 11.3% since FY 2000 has translated to annual net income and free cash flow growth (net of expansion-related cap-ex) of 13.4% and 13.3%, respectfully, over that same period. Management was using free cash to aggressively expand the business (I estimate 70% of capital expenditures are targeted for growth initiatives) and buy back shares (the share count has been reduced by 7% since FY 2000). It has also tripled the dividend from $0.20 to $0.60 a share and whittled down its cash conversion cycle from a stellar 19 days in FY 2001 to 16 days by the end of Q2 2006. All indications are that management foresees no immediate slow-down in revenue or earnings growth, and believes there are much greater international expansion opportunities to boot. While I own a small long-term option position, I'd love to load up on shares at a sub-$40 price, so bring on the consumer negativity!

I'm also cheering down Anheuser-Busch (NYSE: BUD  ) and advanced test probe card manufacturer FormFactor (Nasdaq: FORM  ) even further. Anheuser-Busch, an Inside Value recommendation, is down since it was selected, but given its solid financials and stellar position in the industry, I smell a bargain. And so does Warren Buffett, who owns more than 5% of the company.

Cheer your own portfolio
Peter Lynch once wrote, "The best stock to buy may be the one you already own." Unfortunately, that can be difficult if you've picked good stocks that go up.

That's why I've twice been caught cheering for Portfolio Recovery (Nasdaq: PRAA  ) to get pummeled. The first time, I wanted to own the stock. The second time was this past spring. Fear of pending bankruptcy overhaul legislation drove what had been a $41 stock at Christmas to $32 by mid-April. But get this: Nothing had appreciably changed with the company, as was evidenced by a stron