At its heyday in 2000, Cisco traded as high as $82.00 a share, only to see its price erode to a recent value below $19.00. Almost five years after the end of the boom, Cisco investors are about 77% poorer than they had been at the top. Cisco's business is solid -- not only did it survive the meltdown, but it is still the go-to company for most networking needs. Cisco's stock, on the other hand, had gotten way ahead of itself. The company had simply been priced to perfection by unrealistic growth expectations; there was no margin of safety to protect investors from the inevitable business slowdown.
With the boom times over, it became easy to get lulled into a false sense of security that the Nasdaq bubble had been a once-in-a-lifetime phenomenon and that the siren song of unstoppable growth would never again hold sway over rational valuations.
Of course, it wasn't that long ago that Krispy Kreme
The carnage still continues elsewhere today. As I write this, Taser International
When perpetual perfection and boundless, rapid growth are required to justify a company's stock price, the result is a scenario that Alan Greenspan has justly labeled "irrational exuberance." Fortunately, there's a treatment for investors suffering from that particular malady. The treatment lies in deciding to become a value investor -- in determining a company's intrinsic value before buying and then only investing if the company's price is below that value. Doing so, however, often takes quite a bit of objectivity, patience, and confidence, as it requires acting contrary to rising bubble-level prices and in the face of the public mania that surrounds them.
Shopping for Value
When the Internet bubble neared its peak as 1999 drew to a close, pipeline company Kinder Morgan
Unfortunately, at a recent price of $72.81, and at about 22 times its trailing cash flow, it's no longer as cheap as it once was. For bargain-hunting investors who had uncovered Kinder Morgan when everyone else's attention was on flashier companies like Cisco, the past few years have been quite rewarding. Kinder Morgan investors have seen their investment grow by about 250% during the early part of this millennium.
Of course, the past is not a prologue for the future, or else the bubble would never have burst, and Kinder Morgan would have remained a perpetual bargain. Driving forward while looking into a rear view mirror virtually assures problems, as does investing based on past price movements. Some values may be vanishing, but to quote Philip Durell, advisor for Motley Fool Inside Value, "I won't concede that there was a time -- ever -- when a bargain or two didn't lurk somewhere in the market. Value is out there, even when whole groups of stocks get ahead of themselves."
One place to look for value is in companies that make up the group that Philip calls the Fallen Angels. These are companies that were once the darlings of Wall Street, but who now have been discarded and virtually left for dead.
There may be very good reason for the market's dislike of the firms. Take the auto industry, for example -- specifically General Motors
As poorly as GM has been executing lately, there are several factors that are starting to make it appear interesting for value investors:
- Recent price that values the company at 20% below its book value;
- Better than 5% dividend yield; and
- Analyst estimates that indicate the yield appears sustainable.
With a valuation like that, GM has certainly fallen from grace, and it might even be starting to look like a potential candidate for what legendary value investor Benjamin Graham has called a "cigar butt" investment, that is an opportunity to take advantage of one last cigar puff by investing in a company that has not only been discarded as unfavorable, but left entirely for dead.
Please understand, I'm not for a minute predicting the imminent death of GM. But at its current price, the market certainly does not expect much life. For an investor looking to puff on a discarded cigar butt, this just might be such an opportunity.
When a company requires tremendous growth and perfect execution from now until forever to justify its current price, the odds are very strong that the company's business will eventually stumble and its price will plummet. The dustbin of history is full of such firms. On the flip side, when a company's price is so low and its prospects considered so dismal that the market is predicting that its end is in sight, value investors like Philip over at Inside Value just might begin to salivate.
Looking for a chance to buy near the low, rather than near the high? Help is at hand. A free trial to Motley Fool Inside Value is just a click away.