What a fantastic time to be a value investor.
The market is rolling back prices on some great stocks. It may not feel like much fun to see our portfolios bathed in red ink, but as net buyers of stocks, an opportunity to rummage through the market's bargain bin is a huge plus.
Get over that sense of loss
It's not easy to think long term when we are wired to react to the short term, and this is even more difficult when we are feeling the pain of loss.
A good illustration is the trailing-12-month chart for the S&P 500. It closed at 1,270 on Aug. 1, 2006, and reached 1,411 at yesterday's close (Aug. 16) for an 11.1% return in a little more than a year -- pretty close to the historical 10% to 11% average annual return.
But last night and this morning, the focus wasn't on the positive gains. Rather, it was the overwhelming sense of loss because the index was down 9.3% since its month-ago high of 1,555.
Many superior companies have fallen much more than the index average -- and knowing this is just the tonic we need to get over that sense of loss.
A few screaming values to chew on
There are so many great values around today that it is tough to select just a few. For risk-averse investors, look long and hard at blue-chip market leaders such as Wal-Mart (NYSE:WMT), American Express (NYSE:AXP), or Johnson & Johnson (NYSE:JNJ).
These three stalwarts have less than 4% earnings growth built into their share prices in my estimation, yet all are capable of growing at least in the high single digits. All of them also pay a reasonable dividend and are buying back shares while the price is low. Best of all, you can buy these rock-solid companies for roughly 75 cents on the dollar.
For investors who can stomach higher risks and more volatility, check out private student loan facilitator First Marblehead (NYSE:FMD) and bookseller Borders Group (NYSE:BGP), both of which can be had for close to 50% of my estimate of fair value.
First Marblehead is a growth company at a value price. It operates in an industry growing between 25% and 30% per year but has recently been hit by fears that its two biggest customers, JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), might leave, as well as worries that the market's appetite for the loans it securitizes has waned.
Both banks insist that they have no intention of leaving First Marblehead and the company expects to have no problem with its next securitization (although terms are likely to be less advantageous than in recent quarters).
Borders Group is a turnaround situation headed by star CEO George L. Jones, who had previous stints with Saks, Target, and Warner Brothers. Jones joined Borders in July 2006 and has since announced that nearly half of the company's smaller, unprofitable bookstores will be closed and that international stores could be sold. This turnaround could take a couple of years, but I'm confident it will happen.
More screaming values
The historical outperformance of value investing should give you the confidence to buy in the face of the rabid pessimism of recent weeks. Buying superior companies at excellent prices -- and keeping an eye on the long term -- is how we advise investors at Motley Fool Inside Value.
We just published our annual review issue of Inside Value, where we revealed our 12 favorite investment ideas -- many of which got a whole lot cheaper over the past month. As the advisor of the service, I invite you to take a sneak peek of the review with a 30-day free trial. There's absolutely no obligation to buy -- and while you're there, don't forget to check out all our past picks, research, and back issues.
Philip Durell, advisor/analyst of Inside Value, does not own shares of any company mentioned. First Marblehead, Borders, and Wal-Mart are Inside Value recommendations. First Marblehead is also a Hidden Gems recommendation. Johnson & Johnson, JPMorgan, and Bank of America are Income Investor picks. The Fool has a disclosure policy.
