Commit or Sit

 | Jun 04, 2012 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

FB

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luk

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dell

Mr. Market has decided to take a breather. Turmoil in Europe and a dismal jobs report at home have brought the skeletons out of the closet. The specter of U.S. economic growth slowing turned May into one of the worst months on record for the S&P 500, and after a 12% advance in the first quarter, the index is remains barely positive for the year.

The funny thing is, most rational investors in April knew that Europe was in a monetary mess and this was going to be an improving but bumpy U.S. economy. The selloff in May has done nothing to change that perception, but it has changed stock prices for the better if you are willing to believe that the market has not hit bottom yet. Yet investors are exiting stocks in droves.  

If your holding period is less than six months, it may be best to watch some of the action for the sidelines. Facebook (FB) is the textbook example. Whoever called and begged their broker to get in on the initial public offering or bought shares because Facebook was an amazing opportunity should be ecstatic that shares now trade for $27 vs. the $38 opening price. Yet that is not the case; most people who bought at $38 or higher have fled the stock. Anyone upset over the "failure" of the Facebook IPO should look in the mirror to find the culprit.

The macro environment matters to value investors, but it takes a backseat to valuation. Any asset can be a bargain at the right price, regardless of the unemployment rate. And that price can get better even after you buy it, but that's the nature of the game. Equity prices today certainly look more attractive that they did May 1. They could be more attractive on July 1, but it's a fool's errand to play that guessing game.  

Instead of playing Russian roulette over whether or not stock prices are heading higher or lower, focus on whether individual stock prices represent a cheap asset or not. Conglomerate Leucadia National's (LUK) $19 share price is low-hanging fruit at 76% of book value. The shares are at a 52-week low for a company that has grown book value by more than 15% a year for decades. Leucadia is a collection of many diverse businesses, some wholly owned and others partially owned through ownership of stock. So when the market declines, the mark-to-market value of its holdings drop and investors sell the shares. But management is first-rate and owns a significant amount of stock. When the same thing happened to the stock price in 2008 and 2009, shares more than doubled over the next 18 months.

The big cash-rich tech giants, notably Dell (DELL), have sold off and look very attractive with respect to the free cash flow they generate. With a stock price of $12 and more than $3 per share in net cash, Dell is ripe for a value-creating catalyst. The company bought more than $2.5 billion worth of its stock in the last fiscal year, and it will do something similar this year, easily financing it with internally generated cash flows.  

The only certainty about stocks is that future expected returns go up when stock prices go down. Try and time markets and you could get wiped out. Commit only when the price the right, always mindful to leave a cash reserve component, and results are likely to be favorable over the next year or longer.

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