Great Stocks the Market Fears

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 from the ballyhoo -- is one of the most important lessons for investors to remember.

That's especially true in a market like this, where fear and emotion are calling the shots. Market temper tantrums are creating more investment opportunities than we've seen since the Great Depression. The trick to finding great investments lies in shoving aside emotional barricades and focusing on the empirical facts.

To unearth 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 three stocks have too much fear and too little fact baked into their current prices:

Sources: Motley Fool CAPS, Google Finance, and Yahoo! Finance, as of Aug. 19.

A closer look at ConocoPhillips
Earlier this month, my Foolish colleague Matt Koppenheffer said of one famed investor's massive bet on Bank of America (NYSE:BAC), "Great investors can give you good ideas, but you will rarely have them by your side telling you why they invested -- and when it's time to sell."

Lemming-like investors learned this the hard way with ConocoPhillips.

After Berkshire Hathaway (NYSE:BRK-A) jumped into the oil giant feet-first last year, investors thought they had it nailed down. The then-common belief that oil could go nowhere but up had been confirmed by the world's greatest investors. If Buffett's in, it had to be true, they thought.

Yet Buffett quickly reminded us that he's human. As he told Berkshire investors in this year's annual letter:

I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.

Crud. Worse for the lemmings, Berkshire began dumping shares just months after it scooped them up. Last week, Berkshire's most recent quarterly filing shows it's still shedding shares at a good clip. Naturally, this gets investors riled up, and a little panicked. It's a perfect example of what Matt's quote seeks to deal with.

But if your fear regarding Conoco solely lies with Buffett's exit, two points need to be addressed:

• Berkshire spelled out in plain English that it's selling shares to harvest tax gains. "Although we expect the market price of ConocoPhillips to increase over time to levels that exceed our original cost, we are likely to sell some additional shares prior to that time and generate additional capital losses that we can carry back to prior tax years," the company announced back in May. Even if it ends up selling its entire position, and I wouldn't be surprised if it does, it'd likely be because the tax gains (coupled with opportunities in other investments) are more lucrative.
• Re-read the language Buffett uses in his mea culpa. He got the price wrong -- not the company, management, or market position. That investors can purchase a Berkshire-quality company at almost half the price it traded for last year should be something to celebrate, not panic about.

As CAPS member japeel writes:

What is clear is that Warren Buffet knows how to identify a shareholder friendly company and [ConocoPhillips] is that in spades. These factors combined with the debacle of last years hedge fund squeeze of the oil commodity market and the subsequent crash in the commodity price mean that [ConocoPhillips] has shown some horrible numbers this year. Assets are written down, oil prices have taken a massive hit, Buffet has reduced his stake, to free up cash for bigger returns in the financial sector, and yet there's no reason why this company shouldn't be hugely cash generative in the medium term with reasonable oil prices. In the mean time, you benefit from a better than risk free return of 4.5% dividend and a bigger real term return as the company buys back it's own stock.

Pretty straightforward. Conoco currently trades at about seven times forward earnings, notably cheaper than rivals ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) -- a good deal, if you're willing to look past the headlines.

Your turn to chime in
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