Have We Reached Capitulation Yet?

Ah -- capitulation. That time in the life of many bear markets when every single investor who's going to sell has finally thrown in the towel and sold. It's the true point of maximum pessimism, where sentiment is so bad that it literally has nowhere to go but up. Capitulation often marks the rock bottom of a bear market, which is why so many market pundits are hoping we've either hit it or are about to get there soon. For as painful as that actual day may be, things will only get better once it passes. Get original file (18KB) Are we there yet? It's hard to see capitulation in real time; it's usually only in hindsight that it becomes clear. Even so, it's not crazy to think we're somewhere near it. We've had several massive sell-offs, bailouts that seem to destroy as much cash as the Federal Reserve can print, and much talk that this current meltdown is akin to the Great Depression. Yet despite all of the government responses, the stock, bond, and housing markets all remain skittish, and banks still aren't happy with the prospect of lending to one another, much less to us poor saps out in the real world. In other words, it's pretty grim out there, but it remains to be seen whether all these nasty news stories and painful market machinations really point to capitulation -- or if there's more pain yet to come. But one thing is abundantly clear. Whether or not things get worse, there are a lot of dirt-cheap stocks available right now. Graham's stocks are back Benjamin Graham, the father of value investing and the man who taught Warren Buffett how to invest, liked companies that could be bought for less than their liquidation value. In essence, if the market is treating a company as if it's worth more dead than alive, it's probably worth buying. If the business survives, it's likely worth far more than that liquidation value. If it fails, you'll likely still get more from the liquidation sale than you paid to buy the stock. Graham perfected his strategy on the heels of the Great Depression, when such tremendous bargains were far more commonly available. The advent of modern electronic markets, computerized screening, and far easier access to capital had made opportunities like those quite scare -- that is, until the Panic of 2008. This table shows just a handful of the Graham-like bargains currently available: Company Current Assets Minus Total Liabilities (in Millions) Market Capitalization (in Millions) Trailing Twelve Month Profits (in Millions) Ingram Micro (NYSE: IM) $2,365 $2,201 $284 Tech Data (Nasdaq: TECD) $1,639 $1,061 $138 Crox (Nasdaq: CROX) $265 $200 $92 Benchmark Electronics (NYSE: BHE) $769 $768 $90 Not only that -- the individual investor has a strong advantage right now. With the implosion of Wall Street and the constriction of the credit markets, financial institutes have shifted en masse into pure survival mode. Even if they can recognize the bargains amid the pandemonium, they can't easily take advantage of them because they can't raise cash. That gives you an opportunity the likes of which the market hasn't seen in decades. More bargains abound If you back away just a bit from Graham's extraordinarily strict criteria, you can find an even larger set of companies that still look tremendously undervalued. Any profitable company that trades below its tangible book value is one that's worth investigating further. In normal circumstances, that list might include a few struggling firms teetering on the edge of oblivion. These days, though, the list includes some pretty well-known names: Company Tangible Book Value(in Millions) Market Capitalization(in Millions) Trailing Twelve Month Profits(in Millions) Discover Financial (NYSE: DFS) $5,691 $5,278 $439 Valero Energy (NYSE: VLO) $14,373 $10,181 $2,714 Royal Caribbean (NYSE: RCL) $6,238 $2,447 $643 When you find companies of this caliber available this cheaply, does it really matter if they've hit rock bottom or if they might still fall a bit before recovering? The time to buy a company is when it is significantly undervalued, regardless of what the rest of the market may be doing. Copyright © 2008 Universal Press Syndicate.