Do you remember 2002? Moviegoers may have been charmed by Harry Potter and My Big Fat Greek Wedding, but investors were experiencing My Big Fat Excruciating Headache. The S&P 500 fell 23% in 2002, but the pain for growth investors was even worse; the S&P 500 Pure Growth index fell 32%.
But does anyone recall what happened in 2003? The S&P 500 was up 29%, while the Pure Growth index rose an incredible 42%. Growth stocks recovered in a big way, and the people who sold at the end of 2002 ended up selling at the bottom and missing out on fantastic gains the next year.
No one wants to be in value stocks now
Today, value investors are experiencing a big fat headache of their own. The S&P 500 Pure Value index is down 24% through July of this year, on top of a 6% decline last year. Declines of two years or more in value stocks are very rare, having happened only five times since 1927: during the Great Depression, during World War II, during the Arab oil embargo, during the collapse of the Internet bubble, and now.
There's a better chance of Indiana Jones adopting a pet snake than of someone putting money into a value mutual fund these days.
Famous value investor Bill Miller, who beat the S&P 500 for 15 straight years, has seen assets in his Legg Mason Value Trust fund drop 60% to $7.6 billon in August from $19 billion last September. Other value investors, like Bill Nygren of Oakmark, are seeing money flow out of their funds just as they see the best opportunities.
You can be a stock market superstar
Superstar investors buy low and sell high. Buying low requires fortitude because share prices only get really low when bad things happen. And because stocks tend to bounce back before the economy does, the best time to buy is when sentiment is negative.
For example, two of the best buying opportunities of the last 40 years were in 1974 and late 2002 -- both times of incredible pessimism, thanks to the oil embargo and the tech meltdown respectively. In both cases, stocks rebounded in short order. Imagine if you had bought unloved tech stock Research In Motion (NASDAQ:RIMM) back in 2002 at a split-adjusted $3 per share when no one else wanted it. Those shares now trade at $53. Netflix (NASDAQ:NFLX) shares traded for under $7 in 2002 but now go for $23.
We are in the midst of a housing and financial meltdown, and pessimism abounds. Could this be a wonderful time to buy? Consider the following:
- When value stocks recover after a few years of decline, they recover in a big way -- up 42% on average (excluding 1933's 177%), according to data from respected scholars Eugene Fama and Kenneth French.
- This is the first crisis where financial companies have used mark-to-market accounting, which means they have recognized massive non-cash losses on their books that might never be realized economically. Perhaps book values already reflect most of the bad news that will occur in this crisis.
- Value stocks are by definition cheap to begin with. If they fall further, it means the values become even more compelling.
The best thing you can do now
It was Mark Twain who said that "History does not repeat itself, but it rhymes." The same goes for the stock market, and if history continues to follow Twain's poetic description, now could be a wonderful time to buy value stocks.
So which stocks should you look into? I would suggest paying close attention to companies with
- Strong brands
- Dominant market positions
- Global diversity
All three factors will mitigate the impact of a global economic downturn. That's because companies with strong brands and competitive positions usually have better margins and pricing power, which enables them to better weather a storm. This group includes companies such as food and beverage giants Nestle, Kraft Foods (NYSE:KFT), Kellogg (NYSE:K), and Coca-Cola (NYSE:KO).
In the financial space, companies with strong global franchises -- such as HSBC (NYSE:HBC) and American Express (NYSE:AXP) -- should be solid investments over the longer term, especially if you buy in at the low prices on offer now.
At Motley Fool Inside Value, we're constantly scouring the market for stocks that are mispriced in relation to their intrinsic worth -- and we're finding the pickings rich at the moment. Click here to view all of our recommendations with a 30-day free trial -- there's no obligation to subscribe.
Fool analyst Andrew Sullivan loves value, but he does not have a financial position in any of the stocks mentioned in this article. Coca-Cola and American Express are Motley Fool Inside Value recommendations. Kraft is an Income Investor choice. Netflix is a Stock Advisor pick. Oakmark is a Champion Funds selection. The Motley Fool owns shares of American Express. The Motley Fool has a disclosure policy.
