For the moment, the market seems to have settled. We're still down for the year, but the huge and seemingly arbitrary daily swings have quieted a bit.
Does that mean the worst is over? It's unclear. The housing market is still in freefall. Banks are still taking billion-dollar writedowns. And the malaise has hit credit cards -- Target
Yet people say the market bottoms about six months before the economy recovers. Maybe that's what's happening here, maybe not. It's hard to draw a firm conclusion, but it doesn't really matter. There's money to be made regardless.
Hit the lobs
If you're a ghoulish value investor like I am, your first thought after the credit bust was probably something like "I'll bet some huge bargains exist in homebuilding and banking stocks." Those bargains exist, but so do dozens of others, because constant grinding negativity drove down so many great stocks.
Sure, you could make money if you identified the subprime winners, but why bother trying to separate the winners from the losers when great stocks that aren't involved in the bust are cheap right now? The subprime-stained stocks are still too ugly and risky for my dollars. In baseball terms: Don't swing at the fastballs. Aim for the lobs.
There's no reason to spend days figuring out whether Ambac Financial
Similarly, steer clear of the investment banks. If one of them can collapse in a matter of days, who's to say another won't? Avoid banks like Washington Mutual
And Pulte Homes
Cheap and easy
Though the market isn't acting like it, the long-term prospects of most companies aren't significantly affected by the credit crisis. If we're in a recession, it will have a short-term impact on most businesses, but it won't last forever. So forget the lenders. Instead, go after the stocks that are also cheap, but don't have the same long-term risks.
For example, the CME Group
Yet this stock has fallen 32% from its highs and is priced at 21 times forward earnings estimates. Not bad for an excellent business with an estimated 24% growth rate.
Health insurers have been hit hard, too. Humana
But I don't believe these are anything other than short-term problems. Health insurers will re-evaluate their models, adjust to any new regulations, raise rates, and go back to printing money. Yet because of the market climate, both of these stocks are more than 25% off their 52-week highs.
Be careful, though
That said, you should still be cautious. The key to investing during a crisis is making sure that the stocks you're buying truly are isolated from the blow-up. One huge company has failed, others could follow, and challenging credit conditions may have far-reaching implications.
For instance, though interest rates are low, it will be much harder to roll over debt with the credit market at a standstill. Examine the balance sheet carefully, and make sure the company doesn't have significant debt that it needs to roll over in the next few years. When lenders get scared, it doesn't matter if you're a "good" credit risk -- you won't be getting money at attractive terms.
Another item to inspect is accounts receivable. Is the company doing business with people who will have a hard time paying their bills? In a credit crisis, you want to own businesses with rock-solid balance sheets and reliable customers.
The Foolish bottom line
Volatility is frustrating, but it has benefits, too. You rarely get the opportunity to buy excellent businesses at massive discounts to their fair value, but this is one of those times.
Every now and then, Fool contributor Richard Gibbons gets a little bit terrified, and then he sees the look in Jim Cramer's eyes. He does not have a position in any of the stocks discussed in this article. Washington Mutual is a former Motley Fool Income Investor recommendation. The Fool disclosure policy is like a shadow on him all of the time.