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.
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.
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. Boeing
Even supposedly "recession-resistant" stocks are feeling the pain. Sanofi-Aventis
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.
The company is Dawson Geophysical, a tiny energy services company based in Midland, Texas. Dawson acquires and processes seismic data for natural gas and oil companies -- essentially the company helps these companies determine exactly what lies in their fields.
As energy prices have soared, so has demand for Dawson's services. Over the last 12 months, this $475 million company earned $34.5 million on revenue of $316 million -- about triple what it produced just three years ago. This demand shows no signs of abating, either. Many of Dawson's crews are booked through the end of 2009, and promising new finds in the Appalachian Basin should keep them busy for years to come. However, even though the company continues to fire on all cylinders, the stock is trading about 30% off its 52-week high!
Dawson 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 owns shares of Dawson Geophysical, which is a Hidden Gems recommendation. The Motley Fool owns shares of Cemex, a Stock Advisor and Global Gains pick. Coach is a Stock Advisor selection. The Fool has a disclosure policy.