Value Investing Playbook: Three Strategies to Beat the Market Today   

     The market is in turmoil, economic growth has flatlined, companies are struggling to survive and investors are in full panic mode.  

     Ahh, soothing music to a value investor's ears. 

     This is because we like to focus on the most undervalued stocks around. And with valuations at their lowest levels in years, the market is offering some of the best opportunities I've ever seen.

     Three areas in particular are showing the best chance for value investors right now... (Full report below)

 

These Stocks Should Rebound First as the Market Recovers Solve the World's Water Problem (and Make a Fortune at the Same Time)

In this brutal market, most stocks are dead money. But when the huge snapback rally happens -- and it might have already started -- a handful of stocks should jump twice as fast as the rest. Are you going to miss the boat? Get the names of these stocks before the market really takes off.

Go Here to Get the Report

Solving the world's water crisis -- and making a fortune at the same time -- is just one of the 11 investment angles featured in our latest report: Hottest Investment Opportunities For 2nd Half 2009.

To see our full range of forecasts and to reserve your copy of this report, go here.

     Three Strategies to Beat the Market Today

     Nobody likes to see daily bloodletting in the market. But look on the bright side. While these downturns can be frightening, think how different investing would be without them. In a perfectly efficient market, we could never buy a stock at a discount, or sell one at a premium -- every security would be perfectly priced, all the time.

     It's only through irrational, emotion-driven selling that value investors occasionally get the chance to pick up a $50 stock for just $25 per share, or possibly even less.

     Value investors like myself are the bargain hunters of the investment world. And when the market is booming and nobody wants to part with their stocks, our job can be tough. But when bearish sentiment reaches a crescendo and investors can't exit their positions fast enough, shopping is good.

Buffett Boot Camp -- Now Open!

     Famed value investor Benjamin Graham once quipped: "When you can buy a dollar for forty cents, you don't have to worry about what the stock market is doing."

     That simple credo succinctly sums up the theory of modern value investing -- only purchase stocks that are trading at a sizeable discount to their intrinsic value. Graham's mantra follows the age-old Wall Street wisdom to "buy low and sell high."

     It sounds simple enough, but it's deceptively complex in practice. After all, the recession has knocked down scores of stocks to historic lows. And to the untrained eye, today's market bloodbath is effectively disguising the deep value picks from the true losers. And that's the problem...

     How do you know if a stock is trading for less than it's actually worth?

     Fortunately, there are a few time-tested strategies that can aid you in uncovering truly undervalued gems.

     Countless investing legends like Ben Graham, Warren Buffett, and John Templeton have used these basic, time-tested methods to produce market-thumping returns for decades.

     You'll learn these simple strategies in what we call our Buffett Boot Camp: A Crash Course in Profitable Value Investing.

     Boot camp enrollment is now open -- and it's free for the first 1,000 subscribers who enter the camp.  Just go here to get started.

     Unfortunately, these rare buying opportunities only come around once or twice a decade.

     The last time the entire market traded at such drastically marked-down prices was back in 2002. As you may recall, stocks went into recovery mode shortly thereafter and rebounded almost +30% over the next 12 months. Few would turn their nose up at that type of gain today. But that was just the broader market -- a number of sharply underpriced stocks could have netted you gains ten times that size.

     As fear flooded the market and corrupted rational decision making, downtrodden investors were willing to sell you quality companies like Research In Motion (Nasdaq: RIMM) for a split-adjusted $5 per share or Apple (Nasdaq: AAPL) for just $12 per share.

     Forward-looking investors who took advantage of the rampant pessimism have since been rewarded with massive gains of more than +1,200% for RIMM and more than +750% for AAPL. And those are hardly isolated examples.

     Don't Let Fear Make You Miss the Rebound

     That's why long-term investors should be cheering this irrational dumping of quality stocks. If you walked into a retail outlet like Best Buy or Target and found row after row of brand-name merchandise marked down -40% or more, you would probably load up the shopping cart. However, though it may seem counterintuitive, investors aren't wired quite the same way and tend to fear massive stock declines rather than embrace them for what they really are -- golden windows of opportunity.

     During turbulent times when the market is in freefall and the economy is foundering, it's all too easy to fall prey to doomsday thinking and throw in the towel. However, this is the time to remain cool and calm -- and pounce on those unloved stocks at wholesale prices.

     At this point, the whole market is undervalued and poised for a rebound once confidence returns. But just as we saw in 2002, you can bet that some stock will undoubtedly emerge as market leaders and sprint far ahead of the pack. To pinpoint these future winners, there are three time-tested strategies that value investors can use.

Strategy #1 -- Astonishing Value Plays

     Price/earnings ratios can be fairly blunt instruments. However, they do give us a pretty good idea of what investors are typically willing to pay for a company relative to every dollar of earnings it generates. And they can also serve as a broad indicator of whether a stock, a specific sector, or even an entire country is undervalued or overvalued.

     Of course, some industries traditionally trade at relatively low earnings multiples even in good times, so they might not be as cheap as they seem at first glance. Therefore, it's usually a good idea to compare a stock's P/E to that of its peer group and its own historical average. If a quality company with an undamaged outlook typically commands 20 times earnings but is suddenly getting only 10, then you may have a viable prospect.


The last time the S&P 500 P/E ratio was this low, stocks promptly took off on a multi-year tear.

     Over the last 20 years, the S&P 500 has traded at an average P/E of 23.3. Now it trades at 14 times earnings. 222 of the 500 holdings have P/Es below 10. And 478 of the 500 are trading below their 20-year average multiple. The last time P/E multiples fell this low was in 1997. You can see what happened next -- stocks enjoyed a multi-year rally and rocketed to new highs.

Strategy #2 -- Cheap
Growth Plays

     As you can see, P/E ratios are useful in identifying severely underpriced stocks that may be poised for a dramatic recovery. However, like any metric, they don't tell the whole story. After all, they say nothing about a company's future growth potential. Two stocks trading at identical P/E ratios might seem to be equally valued. But what if the first company was expected to deliver earnings growth of +10% annually and the second was projected to boost its bottom line by +20% per year?

     All things being equal, you would clearly prefer the second company.

     Companies that may seem expensive on the surface are actually undervalued once their future growth potential is factored in. So investors that automatically dismiss stocks with seemingly high P/Es could be missing out on some of the market's most extraordinary opportunities.

     I've found 146 stocks selling for earnings multiples below 10 that are projected to grow more than +25% next year. Legendary money manager Peter Lynch once said that when you find a 25% grower trading at just 20 times earnings, it's time to "back up the truck." So can you imagine the potential gains waiting for investors that can find the same promising company trading at a rock-bottom P/E of 4?

      I've found a liquor distributor in exactly this situation right now. Once this stock regains its normal P/E of 22.6 that it averaged for the past 10 years, you could be sitting on $5.70 for every $1 you invest now -- and that's assuming the company doesn't increase its profits by a single penny.

Strategy #3 -- Fat Dividend Plays

     There is another silver lining to the market's precipitous plunge: dividend yields are at historic highs. You don't always get this gift when stocks drop. When the tech bubble popped yields rose a bit, but that was nothing compared to what we are seeing today.

     There are scads of double-digit yielders out there. For example, dull oil pipeline operators that typically yield 5% to 7% in normal times now sport enticing yields of 12%.

     These rich yields don't last for long. When the market returns to normal, payouts could well slide back to 6% -- but for investors who act today, you will have doubled your money by that point. Better still, if that same pipeline operator increases its dividends over the next few years (as most do), you could soon be earning 15%, 18%... even 20% or more on your initial investment.
 

     Aberdeen Australia Equity Fund (AMEX: IAF) saw its yield spike up in August 2007. Investors who bought to capture the yield of 11% saw their shares jump from $12.50 to $17.50 in less than two months.

     This just goes to show how quickly these high yields can disappear if you don't act to lock them in.
    

Now Is the Time to Get In

     There are two ways to look at this tumultuous year-long sell-off in the market: It's either a frightening nightmare or a golden window of opportunity.

     Yes, most of the ticker symbols you follow (or own) are down alarmingly from their peaks. But as Warren Buffett astutely reminds us, successful investors don't rent stocks -- they own businesses. And right now, many of the world's most powerful companies can be purchased at levels and with yields that haven't been seen in decades.

     We even found one shipping company that enjoyed a stable 8% yield for years -- until this market discounted its price tag. Now you can get the same stock with a yield closer to 20% -- thanks to its lowered price and the fact that it raised its dividend distributions every quarter in 2008.

     Thanks to the market's manic-depressive mood swings, you can take advantage of this clearance sale and make your investment dollars work harder. But as investors come to their senses, these deals will disappear. To discover what we're doing and learn more about some of our favorite new ideas, just follow this link.

     Good investing!


 -- Nathan Slaughter, Editor
 Half-Priced Stocks

P.S. Investing in Berkshire, the Wisdom Fund, or just picking up stocks that are traditional Buffett favorites are all good ways to cash in on Buffett's timeless value philosophy. However, the best idea of all is to learn from Buffett's investments and try to adapt his techniques to your own investment strategy. In our Buffett Boot Camp you'll discover why it's best not to just copy Buffett's work -- but to learn from it.

P.P.S. After completing our Buffett Boot Camp you'll receive a coupon worth $100 that you can apply toward our value investing advisory, Half-Priced Stocks. This advisory helps investors identify securities that are trading at steep discounts to their intrinsic net worth. In some cases this discount can reach up to 50% or more, giving savvy value investors the chance to purchase quality stocks for just pennies on the dollar. But the only way to get the $100 coupon is to complete our Buffett Boot Camp. Remember, if you're among the first 1,000 to enroll, the Boot Camp is free. Ready to start? Just click below.

BuffettBootCamp.com