Recycling Past Ideas for Future Gains

 | Sep 14, 2011 | 1:00 PM EDT
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Warren Buffett often likes comparing investing to baseball, such as when he suggests avoiding the temptation to swing at pitches that are too tough to hit and instead wait for a fat pitch down the middle. Yet, investors, unlike baseball players, have one very distinct advantage: There are no called strikes in investing. You can wait until you are presented with a juicy opportunity. Another advantage in investing is that hard work expended in the past can become more valuable in the future. Buffett, of course, is the prime example. With each passing year, he has become a better investor. Over time, he has had more money to work with and the results speak for themselves.

The market decline that began in May has created some interesting prices in businesses that I liked in 2009. While the S&P 500 is not even close to the lows of early 2009, some stock prices have come close to those levels. In most cases, the long-term, intrinsic value of the businesses has not been impaired. Most businesses operate in cycles, and Mr. Market reacts to those cycles by adjusting prices.

The share price in construction equipment company Terex (TEX) is again approaching attractive levels. I discussed the merits of the business when shares were trading in the mid-teens. During the recession, Terex de-levered its balance sheet by shedding divisions. Now, it is now a company that commands a leading market share in each of its business lines and earns a majority of its sales outside the U.S. Shares advanced to nearly $40 by March 2011. Today they are back trading at $13.

ATP Oil and Gas (ATPG) is another name I had the good fortune of spotting at $7 per share in 2009. Thereafter, shares proceeded to fall to $3 before advancing to $21 earlier this year. Now, the stock is trading for $11, but it fell as low as $6 in August. Another dip back into the single digits would be interesting indeed. The company is rich in proven and probable reserves. Total oil and gas proved reserves are 2.36 barrels of oil equivalent (BOE) per share and 4 BOE of proved and probable reserves per share. No debt matures until 2015.

Dean Foods (DF) is the largest producer of fresh milk in the U.S. The company is not a glamorous, high-margin business; margins are razor thin, but sales are enormous. Shares are trading back at $8.50 a share, or a market cap of $1.5 billion. Net debt is nearly $4 billion. Dean generates more than $12 billion in annual sales or $69 a share in revenues. All you need is a tiny boost in margins to super-size profits. Somehow, I can't see the largest milk producer in the country going under.

In the short run, market selloffs are often indiscriminate. Unless a company has suffered from a specific setback or benefited from a gross overvaluation, there is nothing rational about a business that loses 75% of its value over the course of a couple of months. Yet, that is what is happening today. Instead of trying to uncover some new hidden gem, now is a fantastic time to dust off your old research and use it to your advantage.


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