Remember "irrational exuberance?" Well, it has now turned to "irrational pessimism." The market has gone full circle from one extreme to another. Last Friday's news of the bailout bill being passed, turned out to be a selling opportunity. It was predictable, as the smart money ended up "buying the rumor" and then quickly turning to a "selling the news" attitude, so Friday's 450 point swing was not surprising.
Bearish sentiment is at a high point, rendering "silent buy signals" to the smart money. There was no doubt plenty of selling going on, but to be fair, the selling is offset, by an identical amount of buying. The good news is this extremely oversold condition grants a target rich environment for value players looking to pick the low hanging fruit. The bad news is my head was handed to me on a platter as a majority of my holdings all managed to achieve new 52-week lows.
Value investors are in heaven
The recent meltdown is a value players dream. These folks are like kids on XMAS morning with so many bargains popping up. Defensive stocks such as food, drug and basic retailers should be their focus, as these sectors are necessary - consumers have no choice but to patronize them.
What to look for: make sure your candidate for purchase has sufficient liquidity to weather the bad times. A large cash position and low debt situation is ideal. It is imperative to select companies with a positive cash flow and reliable track record.
Backing up the truck for obscure "mega bargains"
The following food companies have zero debt and all sell at a discount to Book value: Bridgford Foods (NASDAQ:BRID), Imperial Sugar (NASDAQ:IPSU), and Winn Dixie Stores (NASDAQ:WINN). Their low hanging fruit presents compelling value, ripe for the taking.
Cash is king
Each of these food companies are good cash hoarders, and that is a pretty good thing in harsh economic environments. Turn back the clock six years when Apple's (NASDAQ:AAPL) market cap was actually lower than its cash position. The company at that time, essentially was being offered for free because theoretically, you could have acquired the entire company by financing the purchase, and subsequently utilizing the cash on hand to pay off the loan. The transaction in essence, would have allowed AAPL to be acquired at no cost.
Why did this occur? The market was frightened that AAPL would continue in its slump and burn through its cash reserves in the process. Wall Street ended up being dead wrong (it typically is) as AAPL's introduction of iPod eventually created a 2000% gain in the share price. The markets tend to get way out of whack in both directions and history seems to be repeating itself again. I see a distinct resemblance to AAPL's scenario of six years ago with IPSU, WINN and BRID, as their cash positions to market cap are an outstanding 46%, 27% and 15% respectively.
Grocery retailers are cheap
Supervalu (NYSE:SVU) is selling at only seven times analyst 2009 earnings estimates while Safeway's (NYSE:SWY) nine times forward multiple is no slouch either. Both these retailers have minimal exposure to escalating lease charges (occupancy costs), as SVU owns the real estate and buildings on 66% of its locations and SWY holds 40%. I expect we must all continue to eat regardless how bad things potentially get.
Price to sales ratio
The list is comprised of equities whose share price divided by annual sales per share is less than .50 - this metric provides a clue to potential exponential earnings improvements once these entities begin to see margin improvement. Contrast these low ratios with Amazon (NASDAQ:AMZN), which carries a price to sales ratio of 167%, or more than triple those that I single out. The price to sales ratio king is The Great Atlantic & Pacific Tea Co (GAP), with a staggering .07 price to sale ratio. In layman's terms, GAP is generating sales at an annual clip equating at 14 times greater than its current stock market value. The other equities that fall into this noteworthy category are: SVU 10%, WINN 11%, Tyson Foods (NYSE:TSN) 16% Pep Boys (NYSE:PBY) 17%, Smithfield Foods (NYSE:SFD) 20%, IPSU 23% SWY 24%, CKE Restaurants (CKR) 35% Steelcase, Inc. (NYSE:SCS) 40%, and JetBlue Airways (NASDAQ:JBLU) 41%.
Liquidation value versus market value
It is not often when a company's share price gets so decimated that it trades below its liquidation value. It happened to AAPL six years ago and it has potentially occurred to PBY today. According to a recent S&P report, dated 9/16/08, PBY's market cap is below its liquidation value, primarily due to its $1 billion worth of estimated real estate holdings. Bridgford Foods valuable real estate holdings also makes it a candidate, as it owns prime properties in the vicinity of the Sears Tower and Disneyland as well as plants in Texas, and North Carolina
Value approach summary
- Don't prospect in the junk yard
- Select high quality stocks in defensive sectors
- Verify that their liquidity is healthy (minimal debt and a adequate cash position).
- Seek out price to sales ratios below .50
- Find company's with share prices no greater than 1 to 3 times shareholder's equity (book value) but be sure to adjust book by subtracting goodwill .
- Hunt out equities selling at no more than 15 times forward earnings estimates.
- Confirm management has adequate holdings to give them proper incentive to be concerned about the share price, as T. Boone Pickens Stresses, "CEO's, who themselves own few shares of their companies, have no more feeling for the average stockholder than they do for the baboons in Africa".
- Get compensated as your money is parked-look for stocks that pay a cash dividend yielding more than 2%.
- Pursue stocks that are selling below break-up or liquidation value.
- Hone on in companies that are buying back their own shares in the open market.
Start gradually accumulating value stocks. Don't try to pick a bottom, as this strategy is near impossible to achieve. Keep in mind Warren Buffet's famous quote: "We simply attempt to be fearful when others are greedy and greedy when others are fearful". Translation: Be a contrarian and buy when no one else is buying, how else are you supposed to buy low?
The pendulum swings in each direction too far and again this scenario is repeating itself. The smart money on Wall Street aims to buy wholesale and sell retail. At this juncture, it's now possible to "one up" that objective by actually buying below cost. Strip the fear and greed out of the equation and it will be clear which stocks will ultimately rise to the top.
Disclosure: Author owns long positions in all of the above, except has a short position in AMZN.