Anyone who has been in the market over the past year knows just how extreme its day-to-day fluctuations have been. In 49 of the last 252 trading days, the stock market moved more than 2% from the previous day's closing price, either up or down.
If you're a long-term investor, that stat should make you very excited.
Sure, that volatility can be stomach-churning, but it also presents great opportunities for patient investors to profit.
In a report called How to Stop Worrying and Learn to Love Volatility, 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.
Or even rising at an incredible clip
Ezrati's findings suggest that even after the recent stock market rally, it's still a great time to start investing or add new money. All that's left to do is find a good place to park your capital.
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
Even after the recent stock market rally, many good companies still appear attractively priced. McAfee
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, declining commodity prices, looming health-care reform, 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 have a few companies that fit that bill at Motley Fool Hidden Gems, including one candidate that looks ripe for new money now.
Going once ...
The company is Ritchie Bros. Auctioneers
Of course, the economic downturn has affected sales of large industrial equipment, but sales of items priced at $2,500 or less actually increased 26% for the year. That's especially good news for Ritchie Bros., since these smaller pieces carry higher margins.
But although the company's prospects look healthy, the stock is trading more than 20% below its 52-week high!
Ritchie Bros. 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.
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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. Richie Bros. is a Motley Fool Hidden Gems recommendation. Monsanto is an Inside Value pick. The Fool has a disclosure policy.