The stock market is tanking and money managers across the globe are seeing less and less money to manage. But if you look more closely, you get a different perspective.
The stock market is tanking, financial and political uncertainty abounds, and respected money managers across the globe -- thanks to redemptions -- are suddenly seeing less and less money to manage. Things are looking a bit grim.
But if you stand back and take stock of the letters these same money managers recently sent to shareholders, you get a very different perspective.
Ultra attractive prices
Over in the US, Third Avenue's Marty Whitman revealed in his August 11 letter to investors that he's "especially enthusiastic" about the fund's prospects. According to Whitman, the shares Third Avenue specializes in buying are "trading at ultra-attractive prices".
Also in the US, Bruce Berkowitz told his Fairholme shareholders that "We continue to ignore the [panicking] crowd." Using sales, new inflows, and "cash held for stressful times," the fund is buying shares of dirt cheap health-care stocks.
And then there was Bill Miller, who told his shareholders about a conversation he had with Warren Buffett recently, where they both agreed they were optimistic about the future. Moreover, Miller pointed out that the best time to buy his fund was after its performance had been dismal. By that logic, there has never been a better time to buy Legg Mason Value Trust.
The best US money managers are optimistic -- and they're buying.
Here in the UK, although he’s not a money manager, Financial Times columnist and private investor Nick Louth said this week the “…best capitalised banks and top quality property plays…have clearly been at once-in-a-generation prices.” He’s putting his money where his mouth is, recently buying shares in HBOS (LSE: HBOS) at 255p, Persimmon (LSE: PSN) at 218p, Galliford Try (LSE: GFRD) at 41.5p, Keller (LSE: KLR) at 600p and Land Securities (LSE: LAND) at 1200p.
Big companies going cheap
Don't assume that these money managers are ignoring the current financial calamity. There's no escaping it.
But there's also not much any of us can do about it, other than taking advantage of currently depressed stock prices to buy shares of companies that:
- Will be in business 10 years from now.
- Will be bigger 10 years from now.
- Will generate significant amounts of cash in each of the next 10 years.
Take a company like Next (LSE: NXT), for example. Clearly the current economic environment is taking its toll on the company’s sales and profitability, with their latest trading statement flagging no near-term improvement in consumer trading.
No surprisingly, this has been reflected in the company’s share price, with it down from a peak of over 2400p in 2007 to the 1022p it trades around today.
Yet Next remains a strong, profitable, large and growing company. The economy will improve. In the long-term, Next should continue to grow. Yet the market can’t see that far ahead. Thanks to these near-term concerns, you can now buy shares of Next at a price to earnings ratio (P/E) of less than 7 and a dividend yield of more than 5%.
The deals don't end with Next. Vodafone (LSE: VOD), GlaxoSmithKline (LSE: GSK), and even BP (LSE: BP) are all in the cheap category. These and a handful of other well-known giants have been tainted with deteriorating investor confidence.
The question to ask yourself is not how these companies will hold up in the second half of 2008 -- it's how they will hold up over the next decade. If they have a durable brand, cash on the balance sheet, and a verifiable track record as a quality operator, then I believe they will hold up quite well.
That's the easy money
If you're willing to dig in and get your hands dirty, however, you can find even better bargains among the unknown stocks that professional analysts and investors simply aren't paying attention to. As Aaron Ross Sorkin wrote in a recent New York Times column, "[I]t is hard to find good research on small companies. All the focus has moved to large companies where the big money is sloshing around."
That is why small caps are the best stocks to profit from the market’s drop – there is no shortage of bargains out there. In fact, just today I’ve found 3 small companies, all with high profit margins, operating in growing industries, and all trading at what I consider to be attractive prices. I’ll tell you about them another day.
> You can buy shares in these companies for £1.50 commission via Motley Fool Sharebuilder
> This article first appeared on our sister site, Fool.com. It has been adapted for UK readers by Bruce Jackson.
> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in HBOS shares.
