"The stock market is filled with individuals who know the price of everything, but the value of nothing."
-- Philip Fisher

The market may have recovered a great deal since March 9 of last year, but it's still well off the highs of 2007. So it may be fair to ask ourselves: How can we avoid the mistakes that got us here, and how can we find the top stocks to buy today?

Consider this
The mistakes that led to this downturn are reminiscent of the speculative frenzy known as the Dutch Tulip Craze. In 1636, Dutch citizens found themselves caught up in a tulip rampage, fueling skyrocketing orders and prices that grew by as much as 100% per week.

Eventually, one tulip bulb was selling for the equivalent of thousands of modern-day dollars! The market became overbought, and the frenzy bottomed. By 1637, the price of tulips was less than 1% of what it had been before the crash. Value was an afterthought to the tulip "day traders" who sought to profit from irrationally soaring prices.

Quickly fast-forward to the dot-com bust. The growth of Internet companies and an overinvestment in information technology caused the Nasdaq to rise more than 600% from 1994 to early 2000. If you were alive or breathing in the last 10 years, surely you remember what happened next:

  • In 18 short months, approximately $5 trillion was wiped out from the value of technology stocks.
  • Silicon Valley trendsetters such as Akami Technologies (Nasdaq: AKAM) and Cisco Systems (Nasdaq: CSCO) experienced price depreciations of more than 75%.

As with the tulips, it seemed as though everyone was confident in the price of the next "big" stock. The classic example of the overhyped company of the time was Pets.com. After trading for more than $14 per share, it liquidated in less than 270 days at $0.22 per share. Everyone supposedly knew the right price -- but what was the value?

OK, let's talk 2008
Call the last few years what you want. The housing horror. The derivative debacle. The commodity crisis. The securitization scare. There are too many explanations for the collapse to isolate only one aspect.

For the sake of argument, I'll arbitrarily choose crude oil to illustrate my point. The Commodity Futures Trading Commission announced in a report last year that speculators played a role in driving last year's wild swings in oil prices, which spiked at $145 a barrel for crude in July before collapsing to $33 a barrel by December, representing a 77% decline in value over a six-month period.

Smith International (NYSE: SII) and Fluor (NYSE: FLR), two oil and gas service providers, lost more than 60% of their value between 2008 and early 2009 ... and have gone on to reap substantial gains over the last year, though they are still well below their highs. I don't mean to sound repetitive here, but from these numbers, it appears that many investors didn't evaluate these companies' competitive positions but were instead making bets on oil prices.

What, if anything, have we learned?
We can be certain that there will always be ups and downs, booms and busts, good years and bad. So what can we do? One philosophy is to invest in companies with great competitive advantages, clean balance sheets, and a history of success in their given industries.

For example, salesforce.com (NYSE: CRM), a customer relationship management provider, has emerged as a leader in providing companies with ways to track deals with both customers and prospects. In addition, it has managed to get its hands all over the nascent cloud-computing industry, providing online storage for mass amounts of corporate data. With a total debt-to-equity ratio of 2%, an expected five-year growth rate of 35%, and a consistent track record of growing revenues, salesforce.com certainly seems like a good investment. But at more than 80 times forward earnings, does it actually provide you with much value today?

Similarly, you might be excited by the prospects for WebMD Health (Nasdaq: WBMD). Having established itself as a leading online consumer portal for health and medical information, it's well placed if and when the health-care system finally goes digital. Over the next five years, analysts expect the company to grow by a tremendous 22.3%.

But it's trading at more than 48 times earnings and more than eight times its book value. Does that provide value to someone who's looking to buy shares today?

It's hard to know the answers. That's why we focus not only on exciting companies, but on ones that are exuding value, as well.

Here's a place to start
In both bear and bull markets, value investing has provided people with a logical and methodical approach to investing. The general ideas: Don't speculate on questionable growth potential or companies with debatable revenue streams. Look at companies that may be trading well below their intrinsic value for unfounded reasons, seem cheap compared with their industry, and have strong records of returning capital to their shareholders.

Here a just a few companies that fit the bill right now:


% Below 12-Month High

Price-to-Earnings Ratio

Return on Equity

Questcor Pharmaceuticals (Nasdaq: QCOR)




Sun Health Care Group




Exelon Corp.




Data from Capital IQ as of Feb. 22, 2010.

Granted, in some cases these companies' P/Es are artificially low based on last year's higher earnings. But even if earnings decline, they're still pretty cheap.

More ideas
Our Motley Fool Inside Value team seeks out companies that not only have great competitive advantage and growth opportunities (salesforce.com and WebMD, for example), but that also trade at bargain prices. If you're looking for more cheap stock ideas, you can click here for a free stock report.

This article was originally published Aug. 7, 2009. It has been updated.

Fool contributor Jordan DiPietro doesn't own any of the shares mentioned above. Akamai Technologies and salesforce.com are Motley Fool Rule Breakers selections. The Fool's disclosure policy recently redeemed a coupon and received one free burrito. Now that's value.