The Market Drop Opens a Little Door

 | Apr 08, 2014 | 4:00 PM EDT  | Comments
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Price is what you pay, but value is what you get. Stock prices are meaningless noise most of time. Stock prices become important when they open the door to attractively priced assets. Thanks to a three-day pullback, Mr. Market has opened a little door.

Consider the veterinary biopharma company Kindred Biosciences (KIN). Shares are down by more than 30% in the past several weeks without any fundamental deterioration in the business. In fact, the opposite is true. The company, which is the only one of its kind focusing on compounds for pets, continues to cross milestones toward taking a drug to a market. As a result, the company recently announced a $50 million equity offering. Shares now trade for $18, valuing the company for $280 million.

Were Kindred to take a drug to market -- and the likelihood is that more than one will be taken to market in this company's history -- then Kindred would likely become a $1 billion company. Heads you win big, tails you lose little.

Gentex (GNTX) is another high-quality company that is down about 15% in a few short weeks. Gentex is a technology company that serves the auto industry. It makes advanced lighting products for autos that are becoming part of a standard package: automatic dimming rearview mirrors, rear cameras and the like. The company's free cash flow has expanded from $20 million to over $250 million in the last three years. Gentex has a market cap of $4 billion, and continued growth should serve patient investors well.

In his latest shareholder letter, Warren Buffett suggested that investors buy stocks the way they would a piece of real estate. When you own a house or farm, you probably wouldn't blink an eye if someone came to you one day and told you your farm was worth 30% less and offered to buy at that price. Same with a share of stock. When the market drops and a share price plunges in a single day, have the company's fundamentals changed so much in a day to warrant such a drastic revaluation? Or has the price drop created an opportunity to buy that farm again for 30% less than the price paid the day or week before?

Think about prices this way, and you will probably make fewer mistakes.

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