Not too Late to Buy Selectively

 | Oct 27, 2011 | 3:30 PM EDT
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What a difference a few weeks makes in the minds of investors. In September, more people saw a greater chance of a recession and a market that was headed for disaster. Today, almost as if was pre-arranged, we received two important pieces of positive data on the same day: U.S. third-quarter GDP grew by an estimated 2.5%, while the European Union has agreed to a $1.4 trillion bailout of its financial institutions.

The problem is while many investors waited on the sidelines for this news to sort itself out, Mr. Market was busily bidding up share prices in anticipation. After dropping to $14 a share, industrial titan Oshkosh (OSK) is now trading near $21, up nearly 50% in less than a month. The mining and construction equipment company Terex (TEX) dropped to as low as $9 on fear and it now trades near $17, up nearly 100%. Keep in mind, these are well-known, quality businesses, not fly-by-night small-caps.

Financials are clearly going to be in strong rally mode today, thanks to some alleviation of fear that Europe's financial institution may have gone the way of Lehman after all. But valuations clearly remain depressed for many names, even despite this mini rally. After dropping to as low as $84, Goldman Sachs (GS) is now trading for $110. Even so, at that price it's not too late for investors to own a quality franchise at a price well below intrinsic net worth. I won't deny that the good old days of easy profits for investment banks may be gone for good, but capital markets are the blood system of the economy. And Goldman has proven time and time again that it can adapt.

Homeowners Choice (HCII) is an attractively priced, Florida-based property and casualty insurance business. The company's combined ratio, a measure of profitability in the industry, sits comfortably below 100%. Anything below 100% implies an underwriting profit. It's normal for great insurance companies to have combined ratios of 105% since investment income from the float can usually yield profits. In addition to generating an underwriting profit, HCII trades at 80% of book value and yields 5.2%. Current earnings translate into a multiple of 8.

Navistar International (NAV) is Carl Icahn's newest target. This maker of military trucks, engines and RVs, as well parts for those products, is a high-quality business that is being thrown away. Expected to grow its EPS to more than $6.00 in fiscal 2011 from $5.00 in fiscal 2011, the shares are likely oversold at $42. Icahn's stake in both Navistar and Oshkosh suggests that he sees some tremendous value in this space.

The temptation to buy now is as strong as ever. Each day, we receive better news about our economy and Europe. But the reality is that central banks still play a vital role in the economic recovery. However, the quick surge in the S&P 500 this month has picked the low-hanging fruit. It's tough to watch stock prices go up while you are on the sidelines. Today's reaction is due to investor confidence that a catastrophe has been avoided; However, the task to get the economy and people working again still remains. Choose your investments wisely and always pay attention to the price you pay.



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