The stock market is tanking, financial and political uncertainty abounds, and respected money managers -- thanks to redemptions -- are suddenly seeing less and less money to manage. Things are looking a bit grim.
But if you stand back and take stock of the letters these same money managers recently sent to shareholders, you get a very different perspective.
For example ...
Third Avenue's Marty Whitman revealed in his Aug. 11 letter that he recently purchased $1.5 million worth of Third Avenue Value (TAVFX) shares, and noted that he's "especially enthusiastic" about the fund's prospects. According to Whitman, the securities Third Avenue specializes in buying are "trading at ultra-attractive prices" -- such as the net-net situation at Sycamore Networks (NASDAQ:SCMR).
Bruce Berkowitz told his Fairholme (FAIRX) shareholders that "We continue to ignore the [panicking] crowd." Using sales, new inflows, and "cash held for stressful times," the fund is buying shares of dirt cheap health-care stocks such as Pfizer (NYSE:PFE) and WellPoint (NYSE:WLP). Both are top-10 positions, and Pfizer now makes up 10% of Fairholme's net assets.
And then there was Bill Miller, who told his shareholders about a conversation he had with Warren Buffett recently, where they both agreed they were optimistic about the future. Moreover, Miller pointed out that the best time to buy his fund was after its performance had been dismal. By that logic, there has never been a better time to buy Legg Mason Value Trust (LMVTX).
The best money managers are optimistic -- and they're buying.
Now then ...
Don't assume that these money managers are ignoring the current financial calamity. There's no escaping it.
But there's also not much any of us can do about it, other than taking advantage of currently depressed stock prices to buy shares of companies that:
- Will be in business 10 years from now.
- Will be bigger 10 years from now.
- Will generate significant amounts of cash in each of the next 10 years.
Take a company like Best Buy (NYSE:BBY), for example. With $1.5 billion in cash and just $650 million in long-term debt, it's in no danger of becoming insolvent. And with consumers stressed by nearly unprecedented food and energy costs, the company still managed to be solidly profitable last quarter. While this holiday season will likely be tough for the retailer, I submit that holiday seasons 2009 through 2018 will be healthier. Yet thanks to near-term concerns, you can now buy shares of Best Buy for the lowest EV/EBITDA multiple (5.9) in its history as a public company.
The deals don't end with Best Buy. General Electric (NYSE:GE), GlaxoSmithKline (NYSE:GSK), and even eBay (NASDAQ:EBAY) are all in the bargain bin. These and a handful of other well-known giants have been tainted with deteriorating investor confidence.
The question to ask yourself is not how these companies will hold up in the fourth quarter of 2008 -- it's how they will hold up over the next decade. If they have a durable brand, cash on the balance sheet, and a verifiable track record as a quality operator, then I believe they will hold up quite well.
That's the easy money
If you're willing to dig in and get your hands dirty, however, you can find even better bargains among the unknown stocks that professional analysts and investors simply aren't paying attention to. As Aaron Ross Sorkin wrote in a recent New York Times column, "[I]t is hard to find good research on small companies. All the focus has moved to large companies where the big money is sloshing around."
That is why small caps are the best stocks to profit from the drop -- and why, while, I'm happy to reveal some of my best large-cap ideas to you right now, I'm keeping my best small-cap ideas for our Motley Fool Hidden Gems subscribers.
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