"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 2008's 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 past 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 Microsoft (Nasdaq: MSFT) and Oracle (Nasdaq: ORCL) experienced price depreciations of more than 60%. 

Of course, both companies have rebounded since that time, but it if you were to evaluate either of these companies today, you'd have to ask yourself -- where are they in terms of growth, and what are your fundamental expectations for the future? Does Oracle, expected to grow at a 14% clip over the next five years, command a forward multiple of 23 times earnings? As a more mature company, it seems like Oracle should be closer to Microsoft's more reasonable multiple, which sits at about 14.

OK, let's talk 2009
Call the past 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.

One thing is for sure though -- some companies lost tremendous value in 2009, whether it was because of fundamental deterioration or rampant speculation. And on the contrary, some companies went on a rollercoaster ride that took shareholders to extraordinary peaks and then to disheartening lows. The solar industry, for instance, in part propped by massive government subsidies, was a hot sector to be involved with. First Solar (Nasdaq: FSLR) and Suntech Power both saw their share prices rise as investors chased performance; then as solar dropped out of popularity, the companies saw prices decline. Although demand for solar cells has seen a nice pop recently, you've got to consider whether solar power is going to be cost-competitive enough to sustain growth in earnings. It appears that many investors didn't evaluate these companies' competitive positions, but were instead making bets on a new and upcoming industry.

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, Mexican cement producer Cemex (NYSE: CX) is poised to benefit from reconstruction efforts in Haiti and Chile, in addition to a promising global infrastructure build-out. Cemex rakes in revenue everywhere from the U.S. to the Philippines and has managed to increase revenues by an annualized 16% over the past half-decade. But with a forward price-to-earnings ratio of around 60 and a significant debt load, does it actually provide you with much value today?

Similarly, you might be excited about the prospects for Ctrip.com, the Chinese travel service provider. With a budding middle class and more need for hotel, airline, and vacation accommodations, this company is certainly placed well. Over the last five years, it's increased both revenues and net income on an annualized basis by over 35% -- and as a nice kicker, it has absolutely no debt!

But it's trading at more than 40 times forward earnings, so you really have to ask yourself whether or not that provides value to someone 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 are just a few companies that fit the bill right now:


% Below 12-Month High

Price-to-Earnings Ratio

Return on Equity

Smith & Wesson (Nasdaq: SWHC)




Brinks Co. (NYSE: BCO)




Exelon Corp. (NYSE: EXC)




Data from Capital IQ as of April 21, 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 is headed to the Berkshire Hathaway conference this weekend. If you'd like to find out what they learn, click here to sign up for dispatches from the front.

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

Jordan DiPietro owns shares of Exelon and First Solar. Microsoft and Exelon are Motley Fool Inside Value choices. First Solar and Suntech Power Holdings are Motley Fool Rule Breakers selections. CEMEX is a Motley Fool Stock Advisor recommendation. Ctrip.com International is a Motley Fool Hidden Gems pick. The Fool owns shares of and has written puts on Oracle. Motley Fool Options recommended a diagonal call position on Microsoft. The Fool's disclosure policy recently redeemed a coupon and received one free burrito. Now that's value.