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Looking for cheap stocks in an expensive market III

April 27th, 2008 · 1 Comment

Here is something we wrote yesterday:

Banks don’t trust one another because risk has been put in a blender and distributed as confetti to all of them, making a proper assessment near impossible. That leaves the central bank, and boy, they have worked the liquidity card ad nauseam, shoveling enormous quantities down the throats of banks like mothers shovel Brussels sprouts down their children’s throats.

While the confetti was in the air, it seemed like a helluva party, one observer, the great economist turned columnist Paul Krugman likened it to partying like it’s 1929. If that is true, it doesn’t seem to be the best time to come out with stock tips, somehow. Still, people (like myself) try. “Courageous”, perhaps, and this is what Sir Humphrey, the quintessential public servant in the 1980s BBC success series Yes Minister (later, in a really very unlikely turn of events, Yes Prime Minister) would invariably say to the hapless minister Jim Hacker when he was about to do something stupid (which he invariably did). This single, subtle qualification was usually enough to reign in Hacker, as risk taking is not often rewarded in politics. It’s not enough to reign in Motley Fool, whose article we’ve covered twice before here. We haven’t mentioned their investment philosophy for the present market environment yet, here it is:

“focus on stocks that are trading for less than their fair value. Such stocks have a margin of safety and therefore tend to find support even in bad times. What’s more, cheap stocks are often cheap precisely because people are expecting bad news. As a result, any bad news tends to have little effect, while good news causes a jump. So, when the market turns, you can sometimes make money in these stocks extremely quickly.

In fact, that’s the one good thing about this market. There are some stocks that are now unbelievably cheap, and these stocks could have fantastic returns in the next few years. For example, I think both UPS (NYSE: UPS) and FedEx (NYSE: FDX) have been punished excessively and look cheap at these levels.”

This makes more sense than advise you often hear, of the “this stock is cheap, in a year or so, when all these economic problems and market volatility will be behind us, it will be really a lot higher” variety. If stocks look cheap, that doesn’t mean it might not become a lot cheaper, and when the market recovers, most stocks will also rise, so this is hardly stock advise that sticks it’s neck out (it’s looks like it could have come from Jim Hacker instead, it sounds good on the surface, but turns out to be pretty vacuous). I don’t know about UPS and FDX though. Perhaps their business is booming because all these repossession papers have to be send by someone?

Tags: The Markets

1 response so far ↓

  • 1 Capitulation? // Jul 9, 2008 at 11:33 pm

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