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Tickers in this Article: ADM, SNY, SEPR
It has been said that the markets are driven by two forces fear and greed. During times of greed stock prices are driven to unsustainable highs. When we have fear, the markets bring down great companies to a fraction of their value. It is at this low point that companies are trading at levels much lower than their actual values. To profit in times like these we need to find those strong companies that have been brought down by fear and are now trading attractive valuations. (For background, see When Fear And Greed Take Over.)

Three stocks that come up matching this criteria include: Archer Daniels Midland (NYSE:ADM), Sanofi-Aventis SA (NYSE:SNY) and Sepracor (Nasdaq:SEPR).

It's important to note that these companies are not in the same industries. Archer Daniels Midland is exposed to the food and agriculture processing; Sanofi-Aventis is in the healthcare industry, focusing on R&D, manufacturing and marketing of healthcare products, and Sepracor commercializes pharmaceutical products but also engages in research and development.

Valuation

All three stocks are at attractive valuations. Archer Daniels Midland and Sanofi-Aventis are both trading at a forward P/Es of 7. On a trailing twelve months (TTM) P/E basis, both stocks are also in line with the industry average. Taking a peek the TTM numbers shows that they are not overpriced as it removes predictions. Then there is Sepracor which is trading at a forward P/E ratio of 9 and a TTM P/E of 3 this is well below the drug manufacturer industry's multiple of 19. All three are tempting from a valuation standpoint, but Sepracor is obviously leading the way.

Balance Sheet
The balance sheets of all three companies are very attractive:

  • Archer Daniels Midland has $1.3 billion in cash and $11 billion in debt.
  • Sanofi-Aventis has $1.3 billion in cash and $8.4 billion in debt.
  • Sepracor has $750 million in cash and $723 million in debt.
All three hit their 52-week lows on October 10, 2008, but are still within close range. Archer Daniels hit $13.53 up 28% since then; Sanofi at $24.89 is up 12% and Sepracor hit $11.23 now up 12.5%. They have good balance sheets and the markets have pushed the price of the stocks down to attractive long term entry points. While they could remain volatile over the short term, in the long term it is only a matter of time until the markets reward patient investors. (Learn about the components of this financial statement in Reading The Balance Sheet.)

Bottom Line
Clearly, fear like we have seen recently creates great buying opportunities in many strong companies. To be able to take advantage of this fear requires that we don't become paralyzed by it and instead focus on the fundamentals. By doing this we will be able to take advantage of the weakness to create long term gains in our portfolios.

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