No matter how stoic you are, watching your stocks slide daily is unnerving.
At Motley Fool Hidden Gems, we haven't been immune to the sudden and severe haircuts Mr. Market has recently doled out. Since last September, we've had positions decrease 20%, 30% ... even 50%.
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 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 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. Activision Blizzard
Even supposedly "recession-resistant" stocks are feeling the pain. Prescription-drug powerhouse Walgreen just hit a 10-year low.
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 volatile energy prices, competitive concerns, a botched acquisition of Rohm & Haas
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 have 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 now operates more than 550 locations in 38 states, up from just 200 in 2002.
Despite rising chicken-wing prices and softer consumer spending, management recently reiterated that B-Wild should meet its targets of 15% unit growth, 20% revenue growth, and 20% to 25% earnings growth in 2008 and 2009. Yet even though the company continues to fire on all cylinders, the stock is trading 42% 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 have quite a few companies that meet these criteria on our scorecard, and some of them are looking pretty darn cheap. If you'd like to start profiting from the recent market volatility, click here to take a free 30-day trial to the Hidden Gems service. 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's 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, which is a Hidden Gems recommendation. The Motley Fool also owns shares of Buffalo Wild Wings. Activision Blizzard is a Motley Fool Stock Advisor recommendation. Microsoft is an Inside Value pick. The Fool has a disclosure policy.