This Recession Is Gonna Make Me Rich (Again)

Investors today face a dilemma. With the Dow down more than 50% from its peak, top investors like Chuck Acre, Whitney Tilson, and Warren Buffett keep reminding us that stocks are cheap.

On the other hand, every day, newspapers report another round of layoffs, and bleak headlines leave us all wondering how low stocks can go.

So if you think today's an utterly lousy time to invest, well, I certainly can't blame you.

That said ...
Do you remember the Internet bubble? I sure do. When the Great Bubble burst in 2000, I saw my portfolio fall directly into the commode -- down 40% in the space of a few months.

See, back in 2000, I bought into the worst of the worst tech stocks. The overhyped Palm IPO. The overpriced Cisco (NASDAQ:CSCO). The soon-to-be-bankrupt Winstar. And I paid the price for my mistakes. But as the market slowly turned around, I eventually recovered my losses -- and then some.

Of course, the financial crisis we are facing today is far more widespread and threatening than the Internet bubble was. Nevertheless, over the course of time, I learned that building real wealth consists of three simple, timeless steps:

• Earn as much as you possibly can
• Save as much as you possibly can from what you earn
• Invest those savings

Working as many as five jobs simultaneously, my wife and I scrimped and saved. We cut corners. And no matter how much we took home from work, we strove (not always succeeding, I admit) to put away at least a third of our income for a rainy day. Then we invested it.

Invested in what?
I set out to describe the investment philosophy I learned from Motley Fool co-founder Tom Gardner. The result was a 2004 column I entitled "7 Steps to Finding Gems." You can read it for yourself just by clicking through the link, but here's the dime tour:

I invested in companies that:

• Had superb management
• Generated significant free cash flow
• Grew that cash flow quickly, and
• Traded for cheap prices

How low? To keep it simple, I like to see companies selling for a price-to-free cash flow-to-growth (P/FCF/G) ratio of less than 1.0. It's really a fancy-pants version of the PEG ratio, popularized by legendary former Magellan Fund manager Peter Lynch. I prefer free cash flow over GAAP earnings as a measure of profitability; while GAAP profits may be good enough for the SEC, I believe free cash flow is a more reliable indication of financial health.

Now here's the best part
It was easy finding great companies that fit this criterion after the Internet bubble burst. But ever since 2005, I've been having trouble finding many stocks selling for as cheap as I'd like to pay -- until today.

Thanks to the Great Sell-off of '08, stocks finally offer investors today the chance to buy good companies on the cheap. Running one of my favorite stock screeners in search of bargains last week, several likely suspects popped right up, each trading at or near my target valuation, and each rated four or five stars from our 130,000 member CAPS investment community:

Data from Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and Motley Fool CAPS. *Based on consensus earnings growth estimates.

One word of warning
Screens like this one can help you to find bargains, but they've got their limits as well. For example, if you dig a little deeper into Excel Maritime, you'll find that the company is being stiffed by two of its major customers. That's a big problem, since pursuing legal remedies is a long and expensive process, and other cash-strapped customers may try to force Excel to renegotiate their contracts as well.

But by and large, stocks that share these characteristics really are cheap. And with so many available to choose from, the time to start looking is now.

If you'd like a little help with weeding out the false positives today, you can read all of the research and stock recommendations from our team of treasure hunters at Motley Fool Hidden Gems, including their five best stocks for new money now, free for 30 days.

Click here for more information. There is no obligation to subscribe.

Fool contributor Rich Smith does not own shares of any company named above, but he's got a portfolio jam-packed with similar ideas. Stryker is an Inside Value recommendation and Fool holding. Sohu.com is a Rule Breakers pick. The Motley Fool has a disclosure policy.