No matter how stoic you are, watching your stocks drop sharply is unnerving.
At Motley Fool Hidden Gems, we haven't been immune to the sudden and severe haircuts Mr. Market has doled out recently. Since last September, we've had positions decrease 20%, 30% ... even 50%.
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 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 put 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. Baker Hughes
Even supposedly "recession-resistant" stocks are feeling the pain. Campbell Soup
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 decreased consumer spending, competitive concerns, plummeting energy prices, 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 have a few companies that fit that bill at Motley Fool Hidden Gems, including one candidate that looks ripe for new money now.
Be my baby
The company is Natus Medical
Although hospital spending has slowed recently, newborn hearing screening is not a discretionary expenditure. Roughly 95% of children born in the U.S. have their ears checked before they leave the hospital, and that means plenty of recurring revenue for Natus.
But while its business remains sound, the company's share price has dropped more than 50% from its 52-week high.
Natus Medical is exactly the type of opportunity we look for at Hidden Gems: It's a small cap with a strong balance sheet, shareholder-friendly management, and underappreciated growth potential. Better yet, the company's share price has been beaten down, even though its prospects continue to look bright.
We have quite a few companies that meet these criteria on our radar, 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 of the Hidden Gems service. 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 does not own shares of any company mentioned in this article. Natus Medical is a Hidden Gems recommendation. Pharmaceutical Product Development is a Stock Advisor selection. Dell is also an Inside Value pick.The Fool has a disclosure policy.
