Nassim Nicholas Taleb's best-selling book The Black Swan is probably loaded with more good advice than any other single source available. Read the book a few times, and you'll have a better understanding of risk and uncertainty than the vast majority of fancy-pants financial experts.

One common theme from the book is the ability to separate the empirical from the emotional. Sifting out the noise from the numbers -- the significant developments from the total ballyhoo -- is one of the most important lessons for investors to remember.

That's especially true in a market like this, where fear, uncertainty, and emotion are in the driver's seat. More investment opportunities are being created from market temper tantrums than we've seen since the Great Depression. The trick to finding great investments -- and the kind of behavior that's made investors like Warren Buffett madly successful -- lies in shoving aside emotional barricades and focusing on the empirical facts. It's anything but easy, but the results rarely disappoint.

To find a few stocks whose empirical details far outweigh their emotional fears, I called on the wisdom of our 135,000-member-strong CAPS community. In my opinion, these two stocks have too much fear and too little fact baked into their current prices:


Recent Share Price

Forward P/E Ratio

TTM Return on Equity

CAPS Rating  
(Out of five)

AmTrust Financial (NYSE:AFSI)





Lorillard (NYSE:LO)





Source: Motley Fool CAPS and Yahoo! Finance, as of Aug. 5.

Here's a closer look at each.

AmTrust operates in the insurance industry, which is easy to hate thanks to AIG (NYSE:AIG). But it's important to realize that AIG exploded not because of traditional insurance, but one spectacularly stupid derivatives division that acted like a hedge fund on steroids. The insurance industry in general is still healthy, profitable, and promising. But that doesn't stop investors from wanting to avoid it. And that creates opportunities.

For example, I've been keeping an eye on AmTrust Financial for a while now. The more I look, the more convinced I become that this is an underfollowed gem. Not only is this company still growing and cranking out profit, but its stock also trades at a ridiculously low five times forward earnings estimates. Even in this economy, there's no way to justify that. As CAPS All-Star stocki711 writes:

I always saw this as an undervalued safe play but now it is truly the most undervalued mid to small cap in American stocks. Insurance is one of the most tried and true industries and this company will not be effected by health care or any other correction legislation. I think a correction to $20 immediately is warranted due to valuation reasons alone (as well as protecting from a take over).

AmTrust is very good at what it does. At last count, it had a combined ratio of 79.7%, compared to 93.7% and 93.2% for larger rivals Hartford Financial Services (NYSE:HIG) and The Travelers Companies (NYSE:TRV), respectively.

The combined ratio measures an insurance company's profitability by adding together the claims ratio and the expense ratio. The lower, the better, with anything below 100% implying underwriting profitability.

Altria (NYSE:MO) and Reynolds American (NYSE:RAI) are so large and dominant in the domestic tobacco market that Lorillard -- famous for its Newport cigarettes -- gets little love. Moreover, Lorillard's reliance on Newport, which makes up 93.7% of sales, makes investors nervous.

But Newport occupies a powerful market niche that competition has a hard time breaching. As CAPS All-Star MagicDiligence writes:

Newport is one fantastic asset. The brand has been steadily taking market share from competitors like Altria's Marlboro Menthol, and Reynold's Kool brand. In fact, Reynolds has recently scaled back it's promotional support behind Kool, presenting even less of a barrier to continued market share gains. Because of this brand strength, Lorillard can charge a premium for it's product, earning higher margins than competitors and protecting those margins through brand loyalty. The company's operating margin is a sky high 32%. The fact that Lorillard has been able to maintain those attractive margins against competitors hungry for a piece of that profit pie is a testament to the durability of competitive advantage here.

Lorillard recently priced its first-ever debt offering, but said the proceeds would be used for share repurchases, among other things. That means a chunk of the money will ultimately go back to shareholders anyway. This is a classic way to exploit cheap debt, and a nice vote of confidence from management, signaling its belief that its shares are a bargain.

You take it from here
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