Fire Sale Prices On These Quality Stocks

My biggest pet peeve is the parrots on CNBC reciting news that the market has already digested. It seems as though they exist for instilling fear in investors to get ratings, and with any market shock, they sure definitely get an increase of viewers to scare.

When Joe Investor goes home to check his IRA and notices a 7.5% drop in two weeks, of course he wants to find out why. Look at the Alexa reach for CNBC (Financial, Blue) and MSNBC (World News, Red) websites:

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Even with a catastrophe occurring in Minneapolis, the World News site has declined in visitors, while the Financial site has increased tremendously from the gloom and doom journalism surrounding the recent decrease in markets. While these are only for website visitors, one can assume that the same trend is occurring in the TV journalism arena as well.

The name of the game is Ratings, and perhaps the only benefit of that game is that it provides “rational” investors the opportunity to take advantage of “irrational” stock prices. Currently, investors can find quality stocks that have strong growth rates trading at ridiculously low prices. This approximate 8% correction over the past two weeks, though instilling fear in the investing general public, is presenting an opportunity for sidelined investors to pick up stocks at bargain basement prices.

Take for instance Citigroup (C), a diversified financial firm that is feeling the brunt of the drying up of liquidity in the debt markets. It is trading at a forward Price to Earnings ratio of 8.98. This price is at the very bottom of its historical P/E ratio over the past 10 years; the only other time it traded at this low level was in 2002-03, which marked the bottom of the bear market following the technology bubble crash.

The risk to reward ratio seems balanced with Citigroup, as it pays a nice fat 4.72% dividend based on the closing price as of Friday, August 3, 2007 of $45.72. The dividend is comparable to the interest rate that an individual might receive putting their money into a money market account.

Another interesting pick up is a company known as Valero Energy Corporation (VLO), which is a vertically integrated oil company. Vertically integrated means that they not only refine the oil, but they are also expanding in the retail markets and selling directly to the consumer. A competitive advantage over other refiners and retailers is their ability to refine sour crude oil, which trades at a significant discount to the light sweet crude oil, thus opening up the margin for profit for Valero.

This company is a projected 11% annual grower over the next 5 years, and it is trading at a Forward P/E ratio of 7.60. If oil hovers around its current level or if it increases, it will add to the top and bottom line of Valero and potentially make this stock even more attractive. This is just one of many stocks in the energy sector that have attracted my attention over the past few weeks; I thought it was priced attractively at $70, and I think it is a steal at $62.

Well, I have touched on two of the three despised sectors in the market—financial and energy—but what about the real estate market? I definitely have a pick in that arena, and that stock goes by the name of Cohen and Steers (CNS). They aren’t the typical real estate play; they are a company that manages closed-end and mutual funds invested in real estate. They make money through management and advisory fees, which have been skidding since the Net Asset Values of their funds have been dropping along with the broad domestic real estate market.

Cohen and Steers have combated this through the introduction of new funds that deal in international real estate, which has remained strong, as well as new, broader funds to diversify away from its core real estate focus. Another nice feature is that the company is 64% owned by insiders, so it is beneficial for the managers to increase shareholder value. The company is trading at a 14.32 Forward P/E ratio and is projected to grow at approximately 13.25% per year over the next five years. Add to that a 2.53% dividend yield and CNS is one attractively priced stock that is positioned well for future growth and will benefit from any rebound in the domestic real estate market.

So those who can push back all of the gloom hanging over the broad market can easily position their portfolios to take advantage of the irrational stock prices of these three top-quality stocks. While there may be some short-term pain (because it is impossible to time a market bottom), in the long term, these stocks will benefit from a return back to rationality.