To many investors, it's a bear market, a wasteland with few if any opportunities -- even on a global scale. From high points earlier this year, Japanese markets are down 21%, Germany has dropped 33% and France has declined by 34%. And the U.S. and U.K. markets, down 17 or so percent, from peaks earlier this year, aren't far behind.
Yet, at times like these, there's always a bargain to be found. Like those who search for truffles, you just need to know where to look.
Of course, some don't have to look all that far. Case in point: Warren Buffett. The board of Berkshire Hathaway (BRK.A)
Surely Berkshire Hathaway can't be the only publicly traded company that's undervalued at the moment. There must be others, yes?
Other buybacks in sight
According to Morningstar, there are several other companies where boards are likely to approve or have already approved plans to buy back stock.
Railroads, including CSX (CSX),
And there's this list of five-star rated companies that Morningstar dubs its buyback champions, companies that have reduced their shares outstanding over the past five years and which have been able to pay out dividends as well. Firms on that list rated five stars by Morningstar, its highest rating, include BHP Billiton (BHP),
Of course, those are firms where buybacks have been announced already. To find firms where buybacks might be in the offing you would screen for stocks trading their 52-week lows with low debt (as measured say by total debt to total equity where the lower the number, the better) and high cash balances as measured by cash-long term debt/market capitalization.
The latter screen, according to Michelle Swartzentruber, a research analyst with Morningstar, would identify companies that even after paying off debt would have enough cash left over to do buybacks.
Another screen would be to look for stocks with strong balance sheets, strong sales growth and better-than-average dividend yields.
Multinationals hold promise
Meanwhile, Kathy O'Connor, the president at KJ Capital Management LLC, suggests that multinational corporations, if not undervalued, still represent good value. "I believe the most important fact investors should be aware of is that profit margins at multinational corporations are at record levels," said O'Connor, who is also the chairman of the New York Society of Security Analysts.
"Since the late 1970s they have benefited from a lower cost of debt, technological innovations and the transition to a global labor force. While this may suggest investors should prepare for lower profit margin levels, I believe the global demand from emerging economies will allow margins to remain intact for some time."
O'Connor acknowledges that global demand could temporarily stagnate given current conditions. "However, longer-term global demand will continue to outpace local demand," she said. "Most multinational companies have become highly adaptable to changing conditions. And, unlike governments they have a healthier financial structure, allowing them the ability to take advantage of global investment opportunities."
As a side note, O'Connor said the current volatility in pricing levels for the equity market is not being driven by fundamental valuations. "It is based on a lack of confidence in the current proposed fiscal policies and skittish responses by policy makers," she said. "The equity market will continue to climb the wall of worry. If you have capital to invest, this is a good time to take advantage of dips in the market and to select companies with an ability to grow their earnings."
This is not to say that there's nothing to fret about. There is. "I worry more about temporary or harmful policies that distort the long-term objective of economic health and prosperity," said O'Connor.
Large-cap growth, undervalued too
For his part, Jeff Applegate, the chief investment officer of Morgan Stanley Smith Barney, suggests overweighting risk assets and underweighting cash, bonds and inflation-linked securities. Within global equities, the firm suggests overweighting emerging market and U.S. equities and underweighting other developed-market equities. And within U.S. equities, the capitalization preference is large caps, and within style the preference is growth.
"To put things in a broader context, we are not of the view that we are heading into a global recession or decline in corporate profits," said Applegate. "The (recent) selloff is not the start of bear market, but rather a correction that, in the context of the existing bull market cycle, got underway in March 2009."
According to Applegate, corrections of 10% or more each year have been somewhat common since the 1920s. "So as painful as this is, what's happening (now) is not an infrequent event in the long sweep of history."
To be sure, there are worries, including whether euro-zone governments can act to stem the sovereign-debt crisis. But that aside, Applegate is of the opinion that the market is much more undervalued than overvalued at the moment, and there are plenty of companies from which to choose. "The market -- if you look at it broadly -- is trading at a forward price-earnings ratio of below 11," said Applegate. "And if you look at the environment with low inflation and low interest rates, it's very difficult to say that it's an overvalued market."
Bonds are the place to be, too
It might not be that bonds are undervalued either, but during times of volatility such as these this asset class can help reduce the wild ups and downs of one's portfolio, said Fran Kinniry, Jr., a CFA charter holder and principal in Vanguard Investment Strategy Group. "Going forward, it's unknown whether the volatility will stay the same, increase, or decrease," Kinniry wrote in a recent report. "What we do know is that previous periods of excess volatility have clustered around global macro events and that, during those periods, portfolios that included allocations to less risky assets such as bonds and/or cash tended to ride out the storm much more smoothly."
In an interview, Kinniry suggested that adding bonds can offset the volatility of stock market, be it under or overvalued. "The bond portion of your portfolio is not necessarily for income or the coupon," he said. "The bond portion of the portfolio is too offset equity volatility or high-risk asset volatility." And currently, the best type of bonds to add to one's portfolio would be what he called "very traditional" or "very clean" fixed-income investments, such as those found Vanguard Total Bond Market Index Fund Investor Shares (VBMFX).
And the chief benefit of adding this type of investment can be boiled down to this. Investors who had a portfolio composed of 50% stocks (say, the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)) and 50% bonds (say, the iShares Lehman Aggregate Bond (AGG)