Today is my annual physical, which, like dental appointments, putting up Christmas lights and having supermarket tags on my key chain, is something men only do after marriage. Prior to marriage, the doctor's office was a place I only went to when I was so sick that I had no other choice. (I have a great doctor but I really loathe going to see him.) Nonetheless, I am in the magical over-50 zone now, so I am told this is something I have to do.
Looking at your overall health gives you an idea of what you are doing right and what needs to be changed, so it only makes sense to do the same with the markets and your portfolio from time to time.
I am not a macro guy by any stretch and, for the most part, I try to ignore the daily noise and focus on valuations. I talk to many people during the week who worry endlessly about things like GDP growth, analysts' and economists' predictions, minute changes in economic activity indices and the latest surveys. I read these reports, too, but they mostly have nothing to do with the stock market, much less what individual value stocks will do over the next day or year. They are just noise to me.
The same applies to most of the technical chatter I hear every day. Heads and shoulders with plunging necklines were great fodder in a bar when I was single, but they have no impact whatsoever on my investing decisions. They work for some people, but for me they are just noise.
When I look at the markets as a whole, I find that there is some good news. There are some super cheap stocks that can provide incredible returns over the next decade. Small banks clearly make my list, with many of the microcap banks I follow trading well below tangible book value with tons of excess capital.
Some larger banks, like Hudson City Bancorp (HCBK), are so cheap that if they merely survive I think the stocks will provide a return of several times your money from current prices. International banks, like Japan's Mitsubishi UFJ Financial Group (MTU) and the Royal Bank of Scotland Group (RBS), are as cheap as I have ever seen them and could have substantial long-term upside.
There are also super cheap names outside the banks. Jon Heller and I have pointed out a few net/net stocks (companies trading below their net current asset value) that have strong upside potential. Names like West Marine (WMAR), FormFactor (FORM) and Rimage (RIMG) are in the too-cheap-not-to-own category. Tellabs (TLAB) sells at a slight premium to its cash balance. Micron Technology (MU) sells for about two-thirds of my back-of-the-envelope estimate of liquidation value. Hotel real estate investment trusts like Sunstone Hotel Investors (SHO) sell for a fraction of what the larger hotels REITS exchange hands for, and appear to have substantial upside as well. Retail REITs like Cedar Realty Trust (CDR) and Kite Realty Group (KRG) should trade at multiples of the current quotes when the economy recovers and consumer confidence is fully restored.
If the good news is that there are cheap stocks for long-term investors, the bad news is that it is not going to be an easy ride to easy street. It will take patience, discipline and intestinal fortitude to ride out the current economic and market backdrop. I have long said that when you cut through all the noise, the only two economic numbers that really matter are real estate prices and jobs. Neither has improved substantially. Although we saw a slight uptick in new home sales Monday, it was accomplished by lower prices. Real estate prices are no longer in free-fall, but they are still going down across much of the country.
The European situation is an important economic factor as well. A collapse of one of the larger countries, be it Italy or Spain, would have far more serious consequences for the global economy than the mess in Greece. In spite of the constant flow of rumors and denials about various plans to fix the situation, the truth is that no one has a clue how to fix the mess. The news flow is going to continue to create and inflate volatility in stock prices for the foreseeable future.
The key to long-term success is to make the risk and volatility work for you. Be a disciplined scale buyer of cheap stocks and prepare for a wild but eventually wildly profitable ride.