Cheap Stocks Getting Cheaper

The market pullback over the past month has been quick and significant. For market participants who look at the stock market as a way to buy small ownership interests in a business, the market decline should be welcomed and not loathed. While the 2009 market surge eliminated the vast majority of attractive valuations, some names still remain attractively priced. After the correction, the valuations improved.

IN PICTURES: Eight Ways To Survive A Market Downturn

Cheap Insurance
WellPoint (NYSE: WLP) is the largest health insurance provider in the nation. The company ensures over 33 million people, more than 10% of the U.S. population. That pool of insureds is geographically dispersed across the entire country, an incredible benefit in insurance. Healthcare reform or not, WellPoint isn't going anywhere. Any reform that takes place will surely lead to more people needing insurance. This may indeed lead to a greater acceptance of high-risk applicants. But if this happens, then the insurers with the size and diversity are better able to absorb those individuals. Today, WellPoint shares trade for less than five times earnings. You will be hard pressed to find a company dominant in its industry with such an attractive valuation. Even Humana (NYSE: HUM), another excellent competitor, trades for seven times earnings.

Hitting Rock Bottom
Terex (NYSE: TEX) is currently facing its worst operating environment in recent history. Sales are off by over 50%, and net profit has turned into loss. In the meantime, this maker of cranes and other heavy construction equipment has monetized assets and turned a levered balance sheet into one with a net cash position. Management, which runs the company like a real business and is thus focused on the long-term view, feels the company can earn $6 in EPS by 2012-13. Today the shares trade at $20, and you are buying the company at the industry bottom.

Clearly, you are not in danger if management's forecast proves optimistic. If Terex earns $3 a share and commands a conservative multiple of 12 times earnings, shares will climb 75% higher than today's price. Construction giant Caterpillar (NYSE: CAT), like Terex, derives most of its revenues outside the U.S. In addition, Terex derives over 75% of its sales from markets where it is the clear market leader. Yet Caterpillar shares trade for 30 times earnings, while Terex trades for 10. Once this company starts growing profits again, expect the stock price and earnings multiple to go up.

Bottom Line
Prices, not market volatility, should be the only determinant with which an investor should base his buy and sell decisions. The declines of the past month, then, should be welcome news to the enterprising investor. (For more, see The Value Investor's Handbook.)

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