Investors today face a dilemma. With the Dow still down
30% from its peak, top investors like Chuck Acre, Whitney
Tilson, and Warren Buffett keep reminding us that stocks are
cheap.
On the other hand, every day, newspapers report another
round of layoffs, and bleak headlines leave us all wondering
how low stocks can go.
So if you think today's an utterly lousy time to invest,
well, I certainly can't blame you.
That said ...
Do you remember the Internet bubble? I sure do. When
the Great Bubble burst in 2000, I saw my portfolio fall
directly into the commode -- down 40% in the space of a few
months.
See, back in 2000, I bought into the worst of the worst
tech stocks. The overhyped
Palm IPO. The overpriced
Cisco . Worse, I ignored the obvious value in
Apple (Nasdaq: AAPL) -- trading at a pre-iPod
valuation very near its own cash balance. Long story short, I
paid the price for my mistakes. But as the market slowly
turned around, I eventually recovered my losses -- and then
some.
Of course, the financial crisis we're facing today is far
more widespread and threatening than the Internet bubble was.
Nevertheless, over the course of time, I learned that
building real wealth consists of three simple, timeless
steps:
Working as many as five jobs simultaneously, my wife and I
scrimped and saved. We cut corners. And no matter how much we
took home from work, we strove (not always successfully, I
admit) to put away at least a third of our income for a rainy
day. Then we invested it.
Invested in what?
I set out to describe the investment philosophy I
learned from Motley Fool co-founder Tom Gardner. The result
was a 2004 column I entitled "
7 Steps to Finding Gems." You can read it for yourself
just by clicking through the link, but here's the dime
tour:
I invested in companies that:
How cheap? To keep it simple, I sought out companies
selling for a price-to-free cash flow-to-growth (P/FCF/G)
ratio of less than 1.0. It's really a fancy-pants version of
the PEG ratio, popularized by legendary former
Magellan Fund manager Peter Lynch. I prefer
free cash flow over GAAP earnings as a measure of
profitability; while GAAP profits may be good enough for the
SEC, I believe free cash flow is a more reliable indication
of financial health.
Now here's the best part
It was easy finding great companies that fit this
criterion after the Internet bubble burst. But ever since
2005, I've been having trouble finding many stocks selling
for as cheap as I'd like to pay -- until now.
Thanks to the Great Sell-off of '08, stocks finally offer
investors today the chance to earn the kind of profits I
reaped back in 2001-2005. Yes, even now that the market has
"returned from the dead,"
bargains still abound. Running one of my favorite stock
screeners in search of bargains last week, several likely
suspects popped right up, each trading below my target
valuation:
Company
P/FCF
P/FCF/G*
American Science & Engineering  (Nasdaq:
ASEI)
14.6
0.88
MSC Industrial Direct  (NYSE:
MSM)
13.6
0.85
Satyam Computer  (NYSE:
SAY)
10.8
0.68
Transocean (NYSE: RIG)
10.0
0.57
iRobot
9.2 Continued... |