Over the past 12 months, the S&P-tracking Vanguard 500 Index
Indeed, a quick screen finds more than 3,100 stocks that have posted negative returns over the past 12 months. Long-haul achievers such as Yahoo!
Cruel to be kind
Without a doubt, arguments can be made on both sides of the investing equation for all the above. Are Starbucks' headiest growth days behind it? Has the subprime lending meltdown dimmed Countrywide's luster for the foreseeable future? Are concerns about Yahoo's Q1 earnings shortfall -- it missed the consensus estimate by a whole penny! -- shortsighted and overblown?
These are all important questions, but I'd argue that they can only be answered over time -- or through sheer speculation. A more sensible query is this: With stock prices that have declined for the 12-month period that ended with yesterday's close, are fundamental concerns fully "priced in" to these companies' stocks?
Inquiring minds wanna know!
Alas, there are myriad ways of answering that question, too. Numbers geek that I am, I'm a fan of comparing companies' price ratios with those of the broader market and industry rivals and then gauging the gap (or premium) relative to a firm's free cash flow (FCF) history and analyst earnings estimates for the next five years.
Sound rigorous? Thanks. Still, even if a company makes it through the strictest of quantitative screens, some stocks that look like valuation bargains simply receive further markdowns for reasons that only Mr. Market knows. Efficiency happens, yes. But it generally happens over time. And this will be a shocker, I know, but sometimes analysts -- gulp! -- get it wrong. In a big way.
The upshot? Even investors who buy seemingly high-quality companies on the seeming cheap should be prepared for bumps in the road. Those are all but inevitable.
The Foolish bottom line
For my money, the smartest way to prepare for those bumps is by investing in the stock market through world-class mutual funds. Doing so allows you to own speculative plays alongside more buttoned-down picks and small caps among large. Allocating your assets across the market's various cap ranges and valuation spectrum just makes Foolish common sense, and top-shelf mutual funds make doing so a breeze.
How to identify such funds? Managerial tenure is a key component, since any fund can only be as strong as the person who is charged with picking the stocks. Fees, strategy, and whether or not the manager invests his own money in the fund are also key factors.
Not coincidentally, those are among the criteria I examine when making recommendations for members of the Fool's Champion Funds investment service -- and so far, so good. Since opening for business just over three years ago, all but one of our recommendations has made money for shareholders -- and our biggest decliner is off by a whopping 1.2%. What's more, all the stocks I've called out above appear in the portfolio of one of our recommended funds, a pick that's up more than 45% since we tapped it.
Want to sneak a peek at that recommendation and all our others? Good deal -- a free Champion Funds guest pass is just a mouse-click away. Your pass provides 30 days of access to our archives, complete recommendations list, model portfolios, and members-only boards as well. There's no obligation to subscribe.
Take Champion Funds for a test drive now and you'll also have access to our latest special reports: "The Challenge: ETFs vs. Mutual Funds" and "Add Kick to Your 401(k)!" Just click here to snag the reports along with your free 30-day guest pass.
Shannon Zimmerman, lead analyst for Motley Fool Champion Funds, doesn't hold a financial position in any of the companies listed. Starbucks and Yahoo! are Stock Advisor recommendations. Home Depot is an Inside Value pick. The Fool is investors writing for investors, and you can read all about our disclosure policy by clicking right here.