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 recently doled out. Since the beginning of November, we've had positions decrease 10%, 20% ... even 40%.
And frankly, we're excited about it.
Come again?
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 -- but its stock price has.
In a recent report called "How to Stop Worrying and Learn to Love Volatility" (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 to consider committing new capital.
Totally outrageous
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 few stocks that he felt were 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 stocks were.
These stocks are cheap
In fact, many good stocks are cheap right now. Coca-Cola (NYSE:KO) and Northrop Grumman (NYSE:NOC) recently hit 52-week lows. Microsoft (NASDAQ:MSFT) is sporting its lowest price-to-earnings ratio since 1992. Hansen Natural (NASDAQ:HANS) and Whole Foods (NASDAQ:WFMI) have been halved. And these are all strong companies with killer brands.
Even supposedly "recession-resistant" stocks are feeling the pain. Eli Lilly (NYSE:LLY) and AT&T (NYSE:T) are each 23% off their 52-week highs.
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, a messy acquisition, 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 of my favorite personal holdings.
Don't be chicken
The company is Buffalo Wild Wings. As the name suggests, this sports bar serves chicken wings and beer, primarily to males aged 25 to 40. The business sounds simple enough, but B-Wild is steadily building a national presence where none currently exists. The company has about 500 locations in 37 states, up from just 200 in 2002.
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 meet those targets in 2008. Yet even though the company continues to fire on all cylinders, the stock is trading 43% off its 52-week high!
Buffalo Wild Wings is exactly the type of opportunity we look for at Hidden Gems: It's an under-followed 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 of 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 and the Fool both own shares of Buffalo Wild Wings, which is a Hidden Gems recommendation. Microsoft and Coca-Cola are Inside Value selections. Eli Lilly is an Income Investor pick. Whole Foods is a Stock Advisor selection. The Fool has a disclosure policy.
