No matter how stoic you are, watching your stocks slide daily is unnerving.
At Motley Fool Hidden Gems, we certainly haven't been immune to the sudden and severe haircuts Mr. Market has been doling out recently. Since the beginning of November, we've had positions decrease 10%, 20% ... even 40%.
And frankly, we're excited about it.
Sure, seeing those big red numbers can be painful, but we know that volatility presents great opportunities for patient investors to profit. That's particularly true when a company's fundamentals and business prospects haven't declined -- only its stock price has.
In a recent report called "How to Stop Worrying and Learn to Love Volatility," (link opens a pdf file) Lord Abbett senior economist Milton Ezrati showed how market volatility "can actually help build wealth over time, especially for longer-term investors."
According to Ezrati, regularly adding new money in a volatile market allows an investor to purchase more shares at cheaper prices, thus lowering the effective cost basis. Interestingly, Ezrati's findings hold true whether prices are rising or falling.
Of course, few investors feel like adding new money when the market seems to shift momentum at the drop of a hat -- but this is exactly the time when you should consider committing new capital.
Ready to commit that capital? You're in luck -- the market has placed many fine companies on sale.
My Foolish colleague Tim Hanson recently highlighted a stock that he felt was outrageously cheap. Now, Tim's a great analyst and a deadeye three-point shooter (we play basketball after work), but personally, I wasn't terribly outraged when I saw how cheap his stock was. In fact, I've found a stock that's cheaper.
These stocks are cheap
The fact is many good stocks are cheap right now. Cisco
As Tim correctly pointed out in his article, even supposedly "recession-resistant" stocks are feeling the pain. Waste Management
But there's a reason
I think those are all fine companies, and at today's prices, there's a decent chance they'll go on to post market-beating returns. But there's a reason each of them has fallen, be it rising input costs, sluggish same-store sales, competitive concerns, or general recession-fueled fears.
The key to exploiting market volatility is to find situations in which the share price has fallen, but the company's business fundamentals have remained unchanged (or even improved!). We've got a few companies that fit that bill on our Motley Fool Hidden Gems scorecard, including one that is even more outrageously cheap than Tim's company.
Don't be chicken
The company is Buffalo Wild Wings
Despite rising chicken wing prices and softer consumer spending, B-Wild was still able to hit its annual goals of 15% unit growth, 20% revenue growth, and 25% earnings growth in 2007. What's more, management reiterated that B-Wild should also meet those targets in 2008. Yet even though the company continues to fire on all cylinders, the stock is trading 55% off its 52-week high!
Buffalo Wild Wings is exactly the type of opportunity we look for at Hidden Gems: It's an underfollowed small cap with a strong balance sheet, shareholder-friendly management, and the ability to generate steady free cash flow. Better yet, the company's share price has been beaten down, even though its future prospects continue to look bright.
We've got quite a few companies that meet these criteria on our scorecard, and some of them are looking pretty cheap. If you'd like to start profiting from the recent market volatility, click here to take a free 30-day trial. You'll get access to all our recommendations and research, as well as our best ideas for new money now. And as always, there is no obligation to subscribe.
This article was first published Feb. 5, 2008. It has been updated.
Rich Greifner has learned to love flaxseed oil, volatility, and the bomb. Rich owns shares of Buffalo Wild Wings, American Eagle, and Starbucks. The Motley Fool owns shares of Buffalo Wild Wings and American Eagle. Buffalo Wild Wings is a Hidden Gems recommendation. American Eagle and Starbucks are Stock Advisor selections. Waste Management is an Inside Value pick. The Fool has a disclosure policy.