History shows that the stock market has been, and can be, beaten by brave folks willing to buck the momentum herd and focus on fundamentals. The roster of those who are capable of delivering and sustaining market-beating investing results includes legends such as Warren Buffett, Benjamin Graham, Peter Lynch, and Bill Miller. Time and time again, the folks who can beat index trackers are firmly grounded in value-investing principles.
My friend and colleague Philip Durell has studied these masters, their strategies, and their successes. As the lead analyst for Motley Fool Inside Value, Philip's selections have easily outpaced the market's return (as measured by the S&P 500) since the newsletter's inception a little more than a year ago. He has done so by recommending attractively priced stalwarts like home-improvement giant Home Depot (NYSE:HD), the company behind those ubiquitous big, orange stores. He has beaten the market with companies like this, rather than suggesting that subscribers risk their money on "the next big thing" like XM Satellite Radio (NASDAQ:XMSR) or Sirius Satellite Radio (NASDAQ:SIRI). While satellite radio may be on a tremendous growth trajectory, those firms still have not mastered the critical art of generating profits. With their shares priced as though earnings are right around the corner, any stumble in their growth trajectories will likely take their stocks tumbling down as well.
Why value wins
The reason Philip's selections have bested the market is simple. Like the value greats who came before him, he selects strong companies that are going through short-term tough times. Consider the saga of travel and entertainment card giant American Express (NYSE:AXP). A fraud scandal in the 1960s had Wall Street heading for the exits, dropping the company's shares to unheard of lows. Yet one value investor saw the true worth of the firm being left for dead. That investor? None other than Warren Buffett himself. His purchase of a significant chunk of the troubled American Express was arguably the investment that launched Buffett to worldwide prominence in the financial scene. While that particular opportunity came and went well before Inside Value was launched, it's exactly that sort of opportunity that Philip seeks out for subscribers.
It sounds crazy, but such things happen all the time. One of Philip's earliest watch list picks was health-care distributor Cardinal Health (NYSE:CAH). Facing its own accounting scandal and a likely SEC investigation, even as the memories of Enron and WorldCom remained fresh in investors' minds, Cardinal Health looked on as panic filled the air. Up from $43.70 the day it was announced to a recent price of $71.17, that's a better than 62% gain in under a year an a half. It's also a testament to the returns possible when investors are willing to buy when the underlying company is stronger than its shares appear.
The market is an emotional roller coaster. When things are going well for a company, its stock can get priced as though the good times will last forever. When things are going poorly, the market often overreacts on the downside, pricing an otherwise solid company as though its days are clearly numbered. With an objective understanding of the worth of a business, confidence that the market will eventually sort itself out, and enough patience to wait out the process, value investors have beaten the market time and time again. At Inside Value, we're confident that history will repeat itself and value will once again prevail.
Opportunity
knocks
Just after the market closes Wednesday afternoon, another issue of Inside Value will be released. With your trial, you'll also have access to everything we've ever published. You'll be able to take a look at our updated value chart for all of Inside Value's previous picks, and through back issues you can decide for yourself how much value remains in those selections. Click here to begin your free trial and start your journey toward replicating the market-thrashing success of history's greatest value investors.
This article was originally published on Sept. 14, 2005. It has been updated.
At the time of publication, Fool contributor and Inside Value team member ChuckSalettahad no ownership stake in any of the companies mentioned in this article. XM Satellite Radio is a Motley Fool Rule Breakers recommendation. Home Depot is a Motley Fool Inside Value recommendation. The Fool has adisclosure policy.
