Bargains in a Wild Market

In overpowering stock-market selloffs, even the most discriminating investor can lose big money.

Using computerized trading strategies, hedge funds and other institutions sell the entire technology sector, all the major banks, or a percentage of everything they own. Well-heeled and not-so-well-heeled investors dump their index funds. These seemingly haphazard actions, taken with little serious thought, depress virtually all stocks, those of struggling and successful companies alike.

The reverse, of course, is also true. Sometimes investors and traders engage in a buying frenzy, producing a wild rally in stock prices, as happened on the afternoon of January 23.

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A shell-shocked market is susceptible to head fakes, two-hour rallies and strong openings that fizzle. But, mostly, the massive selling campaign of 2008 has shredded the shares of hundreds of sound companies beyond all logical reason.

Apple is case A. On January 22, it reported its highest quarterly sales and earnings ever and proclaimed its product lines to be in superb shape, with revenue up all over the world, thanks in great part to soaring Macintosh sales and healthy profit margins.

However, Apple added cautious words about future iPod sales. Because iPods are 45% of Apple's business, the stock market choked on that nugget and ripped 19% off Apple's shares (symbol AAPL), from $155 to $126, before the stock recovered late in the day to close at $139.07, down 11%. It's down 38% from its 52-week high of $203.

It's easy to argue that Apple got what it deserved. What do you expect, after all, when a company cuts "guidance" and its stock, which doubled between April and November 2007, sells at 30 times expected year-ahead earnings and 35 times trailing profits?

Some backtracking is understandable, but down $29 in three hours? On news that, on honest inspection, wasn't so bad?

On the same day, Motorola announced a loss for 2008 and sinking mobile-phone sales. Motorola definitely has tougher product and business challenges than Apple. Its stock lost 19%, a drop that was deserved.

Apple had the misfortune to schedule its earnings announcement on a day when the market opened in a near-panic. The same news, delivered a month or two earlier, might have cost shareholders 5%.

It's not that the economy's that much worse now than it was during Apple's last quarter, during which sales of Macintosh desktop computers jumped 53% from the year-earlier period and portable computer sales climbed 38%. And Apple isn't slashing its prices or cutting its quality. It's a fair bet that Apple shares will be back to $150, if not $175, before it gets close to $100 again, if it ever does.

Here are some other good investments that have been unfairly mistreated. Three pieces of advice, though:

One, focus on big names with a global presence that are capable of improved earnings even in a worldwide economic slowdown.

Two, because of all the volatility, buy gradually, not all at once. Trying to call the market's bottom or the subsequent upturn is a sucker's game.

Three, a recession or near-recession is no time to bottom-fish in shares of money-losing companies. Wait until the bear is exhausted and the economy is clearly improving to try that.

American Capital Strategies (ACAS, $30.87, up 7.3% on January 23; $49.96, 52-week high). American Capital is a clear beneficiary of lower short-term rates. It's a business development company that borrows from a revolving credit line to finance a vast assortment of companies in all kinds of businesses. The vast majority are not in finance or real estate.

The stock yields nearly 14%. So even if a few more of its loans go into arrears, you'll get paid plenty. ACAS shares are down 40% from their peak last summer, but that seems to overstate the effects that a recession will have on its investments.

American Express (AXP, $46.21, up 6.7%; $65.89, 52-week high). The stock struggles every time investors start worrying about cutbacks in travel. This happened after 9/11 and reflects more-recent concerns that Americans with feeble dollars will cut back on overseas vacations.

Business isn't fabulous. But Amex's shares just hit a five-year low, and the company has already taken a big write-off on some of its loans.

AT&T (T, $36.69, up 2.0%; $42.97, 52-week high). There's nothing wrong with AT&T except that the basic domestic landline business is past its prime. But this isn't the old AT&T. It's now a wireless company, and that's still a great growth field.

General Electric (GE, $34.59, 1.6%; $42.15, 52-week high). If you're frustrated that the long-flat shares of GE just started to break past $40 and now are being ripped apart by the bear's paws, don't be. The stock will bounce back. GE's infrastructure and energy-related businesses are becoming more powerful, and finance and broadcasting are less and less able to take down the company.

Goldman Sachs (GS, $199.39, up 4.6%; $250.70, 52-week high). Goldman is one of the few Wall Street firms to stay out of subprime-related trouble, yet its shares are down 20% from their peak, set last October. This is a puzzler.

Intel (INTC, $19.93, up 7.3%; $27.99, 52-week high). Even with the January 23 run-up, shares of the blue-chip chip maker have sunk 25% year-to-date. But this isn't a tech wreck. Intel is a technological powerhouse with gobs of working capital and new products in the works.

The story channels Apple: Intel recently issued excellent quarterly results, but traders whacked the stock because the company's bosses had the grace, if maybe not the common sense, to be frank about a possible slower rate of profit growth in the year ahead. Sellers have clearly overshot.

Pfizer (PFE, $22.86, up 2.3%; $27.73, 52-week high). A dividend yield of 5.6% offers good protection while you wait to see if this struggling drug-maker comes up with new profit engines to replace lost Lipitor sales when the product loses patent protection in a couple of years.

Southwest Airlines (LUV, $12.76, up 6.5%; $16.96, 52-week high). Southwest's fuel-price hedging program no longer protects profits the way it once did. But Southwest, the financially strongest of the domestic airlines, will benefit if oil prices keep trending down. Its shares haven't been at these levels since 1999.