Sparkling Quality on the Cheap

 | Jan 25, 2013 | 1:00 PM EST
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You could do a lot worse than to buy the four names that sank the most out among S&P 500 stocks Thursday.

Apple (AAPL), once truly the apple of investors' eyes, was the biggest loser, falling more than 12%. The stock has slid 35% since it hit a closing high of nearly $700 on Sept. 19 -- and in a rising market, at that. Apple is beginning to morph from a growth stock to a value stock: After Thursday's drop, it sells for only 10x earnings, compared with a 10-year median of 37x.

It doesn't look especially cheap at 3.3x book value (corporate net worth), but that rate is certainly inexpensive relative to its own history, which features a median price-to-book ratio of almost 20x. For devotees to strong balance sheets, such as myself, Apple is a dream. It has no debt, more than $16 billion in cash, about $23 billion in short-term marketable securities and book value of $127 billion.

After Apple, the largest decline was suffered by McCormick (MKC), the spice company. Shares dropped 6.3% on the day. This is a remarkable company that has yielded gains for shareholders in 11 of the past 13 years. Even during the big crisis in 2008, its stock fell only 14% while the S&P 500 lost 37%.

Personally, I wouldn't buy McCormick at 20x earnings, but I'm a notorious cheapskate. I almost never pay more than a 15x multiple for a stock.

Third in Thursday's red-ink brigade was Noble (NE), a Switzerland-based contract oil driller, whose shares declined 6%. Analysts believe that earnings are on the upswing here, and have pegged 2013 earnings at $3.95 a share vs. $2.05 last year. Their early guess on 2014 is $5.42 per share. Not surprisingly, most analysts recommend the stock.

Finally, Teradyne (TER), a leading maker of semiconductor-test equipment, lost 4.8%. I've always had a soft spot for Teradyne, as it was one of the first stocks I ever owned. The semiconductor cycle is in a sour spot now, but I believe it will recover. This stock may not be timely, but purchasing it qualifies as "buying a straw hat in January" -- a contrarian's mantra.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston. He can be reached via email here.

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