Selected large company shares are trading at their cheapest level in years.
If, after 2008, you're still looking at the stock market as a way to fund your retirement, most people probably consider you a few bankers short of a bailout. It's probably progressed far beyond the point of people refusing to make eye contact with you. In all likelihood, your dog won't look at you, either.
Yes, it's tough proclaiming yourself a stock market bull after a year in which every bull became a fine selection of juicy steaks.
But there are a few perks. Like getting the profits that come from buying shares at what could be some of the best prices you'll ever see.
A Brief History of 2008
Last year was a fantastic demonstration of what happens in a highly leveraged world when everyone needs liquidity at the same time.
Banks needed cash to maintain their capital ratios as defaults escalated. Hedge funds needed cash to fund redemptions and reduce leverage as assets declined.
The problem is, when everyone needs cash, the only way to get it is to sell off assets. And that's what investors did, dumping almost every asset class with the exception of gilts and US Treasuries. The stock market took it on the chin.
An Overreaction
That's not to say that the market collapsed simply because everyone cashed out. The problems in our economy are real. We've seen huge bankruptcies, the unemployment rate has spiked to 7.6%, and consumer confidence is low. Companies that need cash are finding it tough to raise money at reasonable costs.
But the carnage in the market isn't limited to the shaky companies that are likely to suffer the most. The FTSE 100 contains the biggest, most successful, and most stable businesses in the land. Yet most of the companies in that index fell during 2008, with some like Lloyds Banking Group (LSE: LLOY), Royal Bank of Scotland (LSE: RBS) and Man Group (LSE: EMG) being positively smashed.
Certainly, deteriorating business prospects are responsible for some of that drop. But based on valuations, it seems likely investors are selling because they must. Like everyone else, they need the cash.
And that's a really great thing if you're not one of the forced sellers.
The Sweet Spot
Large-cap value shares could be the best way to exploit this opportunity. I'm not just talking about slow-growing companies trading at low single-digit earnings multiples, but also compellingly cheap growth stocks.
For instance, these days, the universe of large-cap value shares includes Tesco (LSE: TSCO). Tesco has huge barriers to competition, a long serving, first-class management team and culture, and is still growing profits at a double digit rate. Yet it's trading for only about 11 times forward earnings estimates, and a forward dividend yield of 3.8%. At these prices, Tesco is a large-cap value share.
So why are large-cap value shares a great investment these days? Not because these shares are certain to outperform the other categories under all circumstances, but because they present the ideal trade-off between risk and reward in these troubling times.
While there's a good chance that the economy will start showing signs of life sometime in 2009, there's a possibility that things will get even worse. When you're betting your retirement, you should own businesses that can survive the worst-case scenario.
Low Risk, High Reward
Generally, large-cap shares fit that criterion. They have the most stable cash flows, the best known brands, the greatest economies of scale, and the best chance of recovering from mistakes.
Would you put your money on Marks & Spencer (LSE: MKS) to withstand a depression, or Moss Bros (LSE: MOSB)? Would you bet on Next (LSE: NXT), or French Connection (LSE: FCCN)? These two examples may be somewhat exaggerated, but powerhouses like Marks & Spencer and Next are far more likely to survive than companies with smaller moats. The big guys simply have the financial clout, the economies of scale, and the proven, winning business models.
In normal times, you'd really have to pay up for these sorts of dominant companies. But thanks to investors dashing for junk stocks, right now you can buy some excellent businesses extremely cheaply.
What's more, due to the poor economy, the earnings of these powerhouse companies will be depressed in 2009, which means that the normalised earnings multiple is even more compelling. Large-cap shares are extremely cheap, and I believe they will offer superior returns over the next few years.
The Foolish Bottom Line
Of course, you still have to be careful -- as 2008 has shown us, you can't just throw a dart at the FTSE 100 and expect to avoid a blow-up. You still need to pay attention to balance sheets and how much cash companies are bringing in during these troubling times.
But if you're alert, you can find the shares right now that will pay for your retirement. If you're interested in ideas, Maynard Paton over at Motley Fool Champion Shares has identified dirt cheap shares he thinks offer the most enticing combination of safety and upside potential. You can read his complete analysis with a 30-day free trial.
> This article was first published on Fool.com and was first published on Fool.co.uk in May 2009. It has been updated by Bruce Jackson, who doesn't own shares in any company mentioned in this article.
