Opportunity Knocks for Value Investors

Great News. Value investors, like myself, see opportunity to make excellent profits when markets are in disarray. Let's look at some industries where stocks have been beaten down recently.

Retailing

Fear of tight money, when credit is very difficult to get for most people, is not important when you consider retailers with great track records over the past 10 years who merchandise low price point products. When you look at the financial results of these companies during prior tight money periods you realize the sky is not falling. Look out three years, not three weeks or three months, and don't worry about every stock price movement. Investors will benefit when the fears of tight money and much lower earnings cease.

Financials

The best way to invest in financials is to make a list of the companies you would like to own, and wait for the 2007 audited results. If your favorite financial companies still made a profit after all the writedowns, buy their shares. Auditors will be forcing companies to write down everything they can imagine. Don't worry about buying at historical lows because the object is to cut your risk level. When the smoke clears, investors are going to want to own the companies with managements who were not overly seduced by sub-prime debt.

Home Builders

Look at what happened to the stocks of mobile home manufactures after their bubble burst in the mid-1990's. Like stand-alone home buyers of recent years, anyone who could fog a mirror got a loan. The latter in mind, most people do not want to contemplate how long it will take for homebuilders to recover.

Still, there will be investors who understand the real value of the land homebuilders own, and who thanks to land values will not have their debt called by their creditors. These investors have a chance of making good money. Conversely, investors who are not willing to do dozens of hours of homework on the real value of property (while understanding better the debt covenants of corporate loans) should probably avoid homebuilders until the dust settles.

The second half of 2007 was surely painful for value investors, but excitement is rising about the values now being created by the panic of others. Take a deep breath, look past any downturn in the economy you may fear, and keep in mind that above average returns await investors who keep their risk low when buying beaten down stocks.

William L Dunn Jr. is a retired money manager. He can be reached at: valuebill@prodigy.net.