Prices Are Interesting Again

 | May 21, 2012 | 3:30 PM EDT
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Investors, by nature, should welcome declining markets, so it was pleasant to see the S&P 500 drop more than 4% last week and more than 7% so far in May. I know that markets will go up over time, but if you want the value of your investments to climb, you have to buy when the market heads lower. There is no other path to sustainable investment success than having the courage to jump in when everyone else is jumping out. 

Prices are interesting again, and it looks like our European friends may send prices lower still. While I believe the U.S. economy is in vastly better shape to withstand any European financial shock, that doesn't mean U.S. equity prices won't experience a little more volatility. More volatility equates to greater opportunity. 

One of my current long-term holdings, fertilizer giant Potash Corp (POT), is now trading at $38, down from about $62 less than a year ago. The funny thing is that the fundamental demand for agriculture, and subsequently fertilizer, has only gotten stronger over the past year. Sure, fertilizer volumes are slacking a bit, but this is the same thing that happened a couple of years ago: farmers delay buying fertilizer when corn prices dip, but eventually they must come back. Both Potash and Mosaic (MOS) are trading near 52-week lows and shares could go lower still. If they do, you should become very greedy with respect to owning these stakes in these companies. 

Keep a very close eye on JPMorgan Chase (JPM) shares. At the Berkshire Hathaway (BRK.A, BRK.B) annual meeting, Warren Buffett revealed that he owned JPM in his personal account. When asked why Berkshire didn't own any JPM, he said that he likes Wells Fargo (WFC) better for Berkshire. Fair enough, but Buffett doesn't make personal investments in mediocre companies either. A trading loss that may total $2 billion or $5 billion now has JPMorgan shares yielding 3.5%, trading at 6x forward earnings and 70% of book value. It's an absurd valuation for one of the best-capitalized banks in the business. Whatever the magnitude of the trading loss, JPM will remain well capitalized. And if the share price heads lower, which is a possibility, I may back up the truck.  

Body Central (BODY) is a rapidly growing retailer for women in their late teens and twenties. The company has been around since 1974 and went public in 2010. From to 2009 to 2011, annual sales have grown to $300 million from $200 million, while annual profit has grown to nearly $20 million from $3 million. Return on equity is nearing 25%, an even more impressive number when you consider that the company has no debt and $40 million in cash. Shares fell nearly 50% in a single day after the company guided a weak second quarter due to the slow-selling summer months. Retail is a very tough business, especially a niche market like women's fashion. But this is a clean business that still expects to earn nearly $0.30 per share in the second quarter. More than 10% of float has been sold short. It's a recipe for a furious rally, especially if the current sales weakness is seasonal.  

Remember, stock prices only matter when they create the opportunity to buy and sell stocks at attractive prices. Everything in between is just noise. Over the coming weeks and months, the noise may continue to give way to attractive buying opportunities.



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