The Dow Jones Industrial Average closed at an all-time high yesterday, opening the fourth quarter with a bang. After a summer of struggles, it was an impressive feat.
But even with these fresh (if arbitrary) records, now is a fantastic time to be a value investor. I believed that back in August, when panic had set in, and I believe it today, even amid so much optimism.
In August, the focus wasn't on the positive gains. Rather, it was on the overwhelming sense of loss because the S&P 500 index was down 9.3% after hitting a high of 1,555 in July.
The market has since recovered, and stocks are mostly in the green -- mostly. There are many superior companies still trading at discount prices. Let's look at a few.
A few screaming values to chew on
I encourage risk-averse investors to look long and hard at blue-chip market leaders such as Moody's (NYSE:MCO), JPMorgan Chase (NYSE:JPM), and Home Depot (NYSE:HD).
These three stalwarts have less than 3% earnings growth built into their share prices in my estimation, yet all are capable of growing at least in the high single digits. JPMorgan sports a 3.3% dividend yield, while Home Depot and Moody's have 2.8% and 0.6% yields, respectively. Home Depot and Moody's are also 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 a Warren Buffett favorite, Sheetrock maker USG (NYSE:USG), as well as insurance broker Marsh & McLennan (NYSE:MMC). Both companies can be had for close to 60% of my fair value estimate.
USG is the giant among wallboard manufacturers. It has a fully integrated supply chain -- from owning gypsum mines down to the manufacturing, transporting, and distributing of Sheetrock. USG also has some of the newest manufacturing facilities in the industry. Taken together, these advantages make it the low-cost producer in its space. As weaker competitors struggle through the housing recession, USG should increase market share and emerge even stronger. I expect this stock to significantly outperform the market in the long run.
Marsh & McLennan was hit hard by scandals at its Putnam mutual fund arm and by Eliot Spitzer's allegations of kickbacks at its insurance brokerage. It has been in transition since then -- these incidents cost the company dearly in both financial and reputational terms. Today, the company is run by squeaky-clean management, and scandal-plagued Putnam has been sold. The key to future success is a return to higher margins at its Marsh insurance brokerage, which I believe is just a matter of time.
More screaming values
The historical outperformance of value investing should give you the confidence to buy in the face of pessimism. Buying superior companies at excellent prices -- and keeping an eye on the long term -- is how we advise investors at Motley Fool Inside Value.
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This article was first published Aug. 17, 2007. It has been updated.
Philip Durell, advisor/analyst of Inside Value, does not own shares of any company mentioned. Marsh & McLennan, USG, and Home Depot are Inside Value recommendations. JPMorgan Chase is an Income Investor pick. Moody's is a Stock Advisor selection. The Fool has a disclosure policy.
