INVESTING COMMENTARY

• 3 Reasons to Be Scared of These Stocks
• A Fool Looks Back
• Get Ready to Buy
• The Fool's Look Ahead
• These Dividend Stocks Won't Let You Down
• Walk of Shame: You Be the Judge
• Why We Love Wild Penny Stocks
• Your Best Chance to Profit in 2009

3 Reasons to Be Scared of These Stocks

Veteran Global Gainsmembers know what we love about China. There's tremendouspotential upside there, with many cheap stocksready to explode in value -- especially among smaller companies.

We can never emphasize enough, however, the dangers that lurk in the world's most populous country -- the nasty traits of some Chinese businesses that make us fear and loathe them.

An emerging giant
There are nearly 2,000 public companies in China. About 450 are listed in the U.S., with that number growing all the time. And many of them are future multibaggers that will make their shareholders rich. Look around and you'll find businesses such as Fuqi International (Nasdaq: FUQI) and Yongye International (Nasdaq: YONG), which have more than doubled in just the past six months.

But we can't pretend these types of winners are easy to find. If you don't know the lay of the land -- the ins and outs of Chinese political structure -- you could quite literally lose a fortune.

Here are just three of the problems to be on the lookout for:

1. Hard-to-decipher financials. The Economistmagazine sums it up better than I can:

The financial results of companies that global investors wish to buy into can be as unintelligible as the dialect spoken in the company town. It is said (with apparent sincerity) that some Chinese firms keep several sets of books -- one for the government, one for company records, one for foreigners and one to report what is actually going on.

In fairness, this was written a couple of years ago and Chinese financials are a bit easier to understand now. And there's no doubt that American companies alsodo not make available the books we'd really like to see. And the ones we cansee aren't necessarily easy to decipher -- especially financials ranging from Freddie Mac (NYSE: FRE) to PNC Financial Services (NYSE: PNC).

But there's little question that we simply can't get the same lucidity and transparency from Chinese companies that we do from domestic firms.

2. Questionable quality of earnings. Quality of earnings refers to the extent to which financial reporting can be trusted. The more conservative management is with its assumptions, the better we feel about the numbers it reports.

A 2008 Barron'sarticle relayed a pretty sobering study from RateFinancials, an independent firm that rates financial reports. Looking at the five largest recent Chinese IPOs -- including LDK Solar and Yingli Green Energy -- RateFinancials found problems with "big increases in receivables, negative operating and free-cash flows, significant amounts of deferred revenues, major prepayments, and sizable long-term commitments to suppliers."

3. Poor corporate governance. China is "perceived to routinely engage in bribery when doing business abroad," according to Transparency International. And in TI's 2008 corruption report, the country falls well below any comfortable level, ranking 72nd.

That doesn't mean every Chinese company is dicey, of course, but investors must be on guard. So while you can check Yahoo! Finance and see that U.S.-based Apple (Nasdaq: AAPL), for example, has an above-average corporate governance rating in the technology hardware sector, such easy tools don't exist for Chinese companies.

To sum it up, our Global Gainsteam warns that "Shareholders of Chinese companies should know that there is no real apparatus by which their interests are protected and that they are essentially betting on being on the same side as management and the majority shareholders -- who as often as not are branches of the government, the military, and/or the Communist Party."

And yet ...
Still, China's vast potential cannot be ignored, and investing indirectly through multinationals like Research In Motion (Nasdaq: RIMM) and Oracle (Nasdaq: ORCL) won't cut it. China is a small part of these companies' businesses; to realize the greatest potential from China's growth, you'll need to look to the domestic companies.

We recommend some China exposure as a part of any balanced portfolio. That's why we travel to the country yearly, and are recently back from meeting with several companies and some prominent investors. These meetings -- the ability to sit at the same table as management and see the business operations with our own eyes -- allow us to separate the good from the bad, and the quality from the corrupt. (You can see all of our notes and stock recommendations with a free trial.)

Uncovering a double
In 2008, China Fire & Security Group seemed to have it all. Revenue had doubled in two years, the country's market for fire safety products was huge, and several high-profile industrial accidents had pressured the government to crack down on safety violators. To top it off, the government enlisted China Fire itself to help write safety legislation. Talk about the fox guarding the henhouse!

But there was a hitch: The website ShareSleuth.com had blasted China Fire for some less-than-stellar corporate structure and ownership issues, and the share price had cratered 60%.

We were fortunate, however, that our Global Gainsanalysts had actually visited the China Fire headquarters, touring the factory and chatting in detail with management. They were convinced the company was working earnestly to address the issues, and that the beaten-down stock price was a real bargain rather than a harbinger of further deterioration. They recommended the stock in May 2008, and it more than doubledbefore it was sold for valuation reasons.

Travel with us
There is a lot to fear about investing in Chinese companies. But our ability to visit the country yearly and talk with promising companies enables us to separate the good stories from the hype. If you'd like to see what we found this trip, as well as our top five stocks for new money right now, we're offering a 30-day free trial to the service. This includes full access to all of our market-beating recommendations. Here's more information.

This article was first published July 5, 2009. It has been updated.

Fool analyst Rex Moore owns no companies mentioned in this article, but does have some direct Chinese exposure. Apple is aMotley Fool Stock Advisor selection. The Motley Fool owns shares of Oracle. The Fool has a disclosure policy .

This article was originally published as 3 Reasons to Be Scared of These Stockson Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

A Fool Looks Back

After several months of rallying equities, nowis when the buyout spigot starts gushing out of control?

Burlington Northern (NYSE: BNI), Diedrich Coffee (Nasdaq: DDRX), and Black & Decker (NYSE: BDK) are just someof the companies that agreedto be acquiredthis week. Good for them and their shareholders.

However, I'm just wondering about the logic of swallowing down public companies now, after valuations have run up dramatically since the market bottomed out in March. Sure, the justification is that many of the deals being brokered these days involve stock. A cynic would argue that they merely represent one company using its marked-up shares to buy another company's marked-up shares.

You also have Warren Buffett to consider. His Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is snapping up rail giant Burlington Northern in a $44 billion deal. He has historically been smart and timely with most of his purchases. He isn't the type to let emotion or rallies sweep him up in the moment, forcing him into a bad investing decision.

If anything, Buffett's meaty acquisition may inspire others to dive into the feeding frenzy. That may not make a whole lot of sense, but the market isn't always supposed to be rational.

Briefly in the news
And now let's take a quick look at some of the other stories that shaped our week.

Until next week, I remain,
Rick Munarriz

This article was originally published as A Fool Looks Backon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Get Ready to Buy

"Over the years, small-cap stocks crush their large- and mid-cap peers."

That's how I planned to start today. By now, I'd be making my case, waving my arms and dropping names like Nagel and Quigley and citing 80 years' worth of Ibbotson data.

And by ... now!... my inbox would be full. "Your numbers are skewed by abnormal years," you'd be shouting, or "What about survivorship bias?" And you know what? You'd be right. The future is not the past.

So forget the numbers
Fortunately, we don't need an Excel spreadsheet to tell us that the widely held megacap companies of tomorrow are mostly small, unknown companies today. It's a historical certainty.

But we do need a few clues to find them ahead of the crowd. If history is any guide, we should be looking for a smaller company ...

And one more thing: Assuming the stock hasn't hit Wall Street's radar yet, there's a decent chance you can benefit from pent-up demand when earnings and revenuepick up and the mainstream press and sell-side analysts finally jump on the bandwagon.

So, what's an "entrepreneurial zealot"?
One of my all-time favorites is Sam Walton, founder of Wal-Mart (NYSE: WMT). But you can go all the way back to Henry Ford and Ford Motor (NYSE: F) -- yes, hard as it is to believe now, Ford really was a great company in its day. More recently, you have John Mackey at Whole Foods (Nasdaq: WFMI). Then, there's perhaps my favorite of all, Jim Sinegal at Costco (Nasdaq: COST).

You never had to check these guys' insiderholdings to know they had huge stakes in their businesses. And, thankfully, there's another one born every day. That's the real beauty of the stock market. It lets us hitch our wagons to the folks who do the heavy lifting for us.

Which is not to say that finding these guys is easy, but I think you can do it. More than anything, we need to be patient and pick our spots. Even better, we can take a cue from Motley Fool co-founder Tom Gardner's Motley Fool Hidden Gems method and screen the market specifically for companies with market caps of less than $2 billion that offer:

Just remember those five keys -- they work
In the '80s, they led thousands of do-it-yourselfers to a neighborhood hardware chain that grew into Home Depot (NYSE: HD) -- a stock that packed on more than 20 times its original value during the '90s alone. One in a million, you say? Not exactly.

As a stock guy with little interest in gabbing with a full-service broker, I caught Bill Porter's enthusiasm for his little outfit called E*TRADE (Nasdaq: ETFC) back when online brokers were just catching on -- just as millions of investors before me had discovered Charles Schwab 's (Nasdaq: SCHW) revolutionary low-cost discount model.

Right now, these five keys are leading my colleagues Seth Jayson and Andy Cross at the Motley Fool Hidden Gemsinvestment newsletter service to a new crop of up-and-coming, fundamentally strong businesses.

Is this market wearing you out?
Honestly, I feel your pain. I admit it: I underestimated the sell-off and was blown away by the bounce back. Could we see more volatility? Sure. Could we suffer the last big pullback everybody's waiting for? It's possible, I guess.

But I'm not buying the rumors that buy-and-hold investing is dead. I've been a buyer recently, but I've got some powder left. And I'm looking to buy more on weakness. I truly believe that these are times we'll look back on fondly. That's why I have a wish list of great small companies on hand for times like this.

You should have one, too. Here's an idea: Do what I do -- lean on the team of independent advisors at Hidden Gems for ideas and advice .They've never led me wrong. And right now, you can try the entire service free for a whole month.

Even better, the Hidden Gemsteam is putting its money where its mouth is; investing real money in their top picks right now. You can get the names of every stock they've bought, plus the one they're going to buynext, and get in before they invest.

Best of all, you're not taking any chances. If you're not impressed at any point during your 30-day trial, I'll personally make sure you don't pay a dime. Even Warren Buffett would be proud. To learn more about this free trial offer, click here.

This article was originally published May 10, 2005. It has been updated.

Paul Elliott owns no shares of any company mentioned in this article. Costco, Wal-Mart, and Home Depot areInside Value recommendations. Schwab, Costco, and Whole Foods areStock Advisor recommendations. The Motley Fool has a disclosure policy .

This article was originally published as Get Ready to Buyon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

The Fool's Look Ahead

Monday
The new trading week begins with priceline.com (Nasdaq: PCLN) and DISH Network (Nasdaq: DISH) checking in.

Consumer-facing companies often feel the brunt of a recession, but analysts expect earnings growth for both the online travel portal and the satellite television provider. This probably isn't a surprise for Priceline watchers, since the company has posted better-than-expected results throughout the economic downturn. DISH may be more of a surprise, since it actually lost subscribers last year. However, DISH has turned things around, and analysts see quarterly profits more than doubling there.

Tuesday
Ralcorp (NYSE: RAH) is one to watch on Tuesday. The maker of store-brand food products is built for economic lulls on two fronts. First, we have food, and everyone needs to eat. Second, we have the value proposition of lower-priced generic foodstuffs. Who needs Cap'n Crunch cereal, when shoppers can recruit Private Crisp for a dollar less on the same dry cereal aisle? Analysts see Ralcorp earning $1.24 a share for its latest quarter, well ahead of the $0.83 a share it earned a year ago.

Activision Blizzard (Nasdaq: ATVI) also releases the latest installment in its Call of Dutyseries on Tuesday. It promises to be one of the hottest -- if not thehottest -- video game of the holiday season. What's the deal with releasing the game right before Veterans Day? Is this a tribute, or in poor taste?

Wednesday
If your Wednesday morning begins with a cup of premium coffee brewed by your Keurig single-cup machine, Green Mountain Coffee Roasters (Nasdaq: GMCR) thanks you. Earnings have been growing quickly at Green Mountain, thanks to the K-Cup boom.

Thursday
Blockbuster (NYSE: BBI) reports on Thursday. Analysts see the company duplicating the $0.11-a-share deficit it posted a year earlier, but the DVD rental chain appears to be more together than the red ink would seem to suggest. Between its low-risk kiosk initiative and cost-containment store strategies, Blockbuster is positioned well as it heads into the holidays.

Friday
The trading week closes out with only a handful of mostly small and foreign companies reporting, but keep an eye on Yingli Green Energy (NYSE: YGE). The Chinese maker of photovoltaic products will provide an excellent glimpse into the global state of the solar energy industry.

Until next week, I remain,
Rick Munarriz

This article was originally published as The Fool's Look Aheadon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

These Dividend Stocks Won't Let You Down

It used to be that if you were a risk-averse investor, you could count on blue-chip dividend stocksto hold their own no matter what the market was doing. Lately, though, no company has been completely safe from the impact of the recession, and shareholders in hundreds of companies have suffered from dividend cuts that have ravaged their portfolios.

Yet figuring out how to stay away from stocks that will cut their dividends is a tough assignment. Even companies like Dow Chemical (NYSE: DOW) and General Electric (NYSE: GE), which had paid steadily increasing dividends for decades, had to cut them drastically earlier this year.

How to get some protection
Given the recent turmoil, you might feel like dividend stocks just aren't worth the risk right now. But despite how many companies have fallen prey to dividend cuts lately, there are ways to predict whether yourstock is likely to cut its dividend anytime soon. Here are four:

If you want to look for the safest dividend stocks, you'll want to find ones that meet all four of those criteria. The exact combination of parameters you look for will clearly change which results you get. But to give you a sense of what sort of stocks you'll find, I looked for companies with payout ratios of 50% or less, dividend yields ranging from 3% to 5%, P/E ratios of 15 or lower, and at least five years of consecutive dividend increases. Here are some of the companies I came up with:

Stock

Payout Ratio

Dividend Yield

P/E Ratio

Consecutive Dividend Increases

Procter & Gamble (NYSE: PG)

39%

3%

14.2

55 years

Johnson & Johnson (NYSE: JNJ)

41%

3.3%

13.2

46 years

Abbott Labs (NYSE: ABT)

41%

3.1%

14.0

36 years

Chevron (NYSE: CVX)

43%

3.6%

12.6

7 years

Lockheed Martin (NYSE: LMT)

37%

3.6%

9.6

6 years

Source: Yahoo! Finance, DividendInvestor.com.

Now before you go out and buy all those stocks, keep in mind that whether a company can sustain its dividend is just one factor that smart investors use to pick good income stocks. At our Motley Fool Income Investor newsletter, lead advisor James Early and his team of specialists look for a combination of attractive features in stocks, including:

In other words, it's not enough that the company pays a good dividend. It also has to have a strong underlying business model that will continue to work for years.

Keep those dividends coming!
Dividend-paying stocks have a history of producing outsized returns for investors. But it's essential to do your best to stay away from stocks that are going to reduce their dividends. In such situations, you lose twice: You not only suffer the direct loss of income from the dividend reduction, but you also typically see share prices plummet as concerns about the health of the company arise.

That's why the Income Investor team works so hard to look for warning signs that a company may cut its dividend in the future. By staying on top of their stock recommendations, they not only seek out dividend payers with large return potential, but also they avoid possible landmines and keep your money safe.

If you'd like to see which stocks they're recommending now, consider taking advantage of a free 30-day trial. You'll see all their current and past stock picks along with the analysis behind them. Just click hereto get started today.

Already a member ofIncome Investor ? Log in at the top of this page .

Fool contributor Dan Caplingerlooks for dividends anywhere he can find them. He still owns shares of General Electric, unfortunately. Johnson & Johnson and Procter & Gamble areIncome Investor picks. The Fool owns shares of Procter & Gamble. The Fool's disclosure policynever lets you down.

This article was originally published as These Dividend Stocks Won't Let You Downon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Walk of Shame: You Be the Judge

They've walked the walk of shame. Now it's your turn to decide which of these head-shakers is the worst of the worst. Check out the recaps of these Foolish Walks of Shame from the past week or so, and then pick the one you think deserves the dubious honor of being most shameful by voting in the poll below.

1. The Fed
Fool writer Alyce Lomax singled out the Federal Reserve on Tuesday. As she put it: "Is the 'fix' better than the disease? [Federal Reserve Chairman Ben] Bernanke's Fed has lowered interest rates to recordlows to rejuvenate the same terrible behavior that got us into trouble in the first place. To juice the economy, the Fed's encouraging banks to make new loans, even when there are still plentyof bad loans out there."

As Alyce reminded us, " Government stimulus may be getting our economy back on its feet, but it isn't real or organic."

2. Ayn Rand
Alyce came back on Wednesday and questioned followers of Ayn Rand's Objectivist philosophy. As Alyce put it: "Ruthless selfishness, on the other hand, is a path to destruction -- parasitic, maybe even sociopathic, behavior. We've seen far too much of it. Shame on Ayn Rand, and on those so enamored of her philosophy that they can't reject its weaker, less practical aspects. It shouldn't be hard to jettison the more dangerous, ill-conceived elements of a philosophy, especially when they threaten all that's good about capitalism, freedom, and our economy."

Alyce called out Chesapeake Energy (NYSE: CHK) Chairman and CEO Aubrey McClendon and Costco's Jim Sinegal as examples of the bad and the good, respectively, in corporate America today.

3. Cash for Carts
Golf carts, that is. A federal tax credit to promote the purchase of electric vehicles includes golf carts, with loopholes that seem to allow someone to get a cart for free. Ford and Toyota Motor probably aren't going to see the same boost they got from Cash for Clunkers, but any credit helps.

Fool writer/editor Jordan DiPietro painted a lovely picture in Thursday's Walk of Shame article: "So for those of you cruising at a leisurely 15 mph, sipping a late-day margarita, and chasing golf balls on a sunny afternoon -- here's your tax break from Uncle Sam. You just received a $4,200 to $5,500 federal credit for the purchase of your new electric vehicle." Shameful, isn't it?

4. Droid's Ad
Earlier today, Fool writer/editor Nathan Alderman took Motorola , Verizon (NYSE: VZ), and Google (Nasdaq: GOOG) to task for the sleek but disturbing ad for the Droid smartphone.

"Even if you ignore the ad's queasy combination of warfare and commerce -- I don't exactly want to buy a product being sold via a bombing run-- I simply can't understand how Motorola, Verizon, and Google think that positioning their product as a destructive, hostile menace is going to endear it to anyone. The iPhone's ads make it look cool, hip, and empowering. This Droid ad makes it seem poised to enslave us all."

5. The White House
Last Friday, Fool writer/editor Eric Bleeker thought it was a shame that insiders won't listen to former Fed Chairman Paul Volcker's plan for what essentially amounts to a modern-day Glass-Steagall Act. There's been push-back from Wall Street players like Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS), and Citigroup .

As Eric noted: "Not surprisingly, Volcker's calls for additional financial reforms have hit a roadblock. The administration isn't open to this line of thinking. Volcker's playing coy about the snub, telling The New York Times, 'I did not have influence to start with.' The chairman of the White House's Economic Recovery Advisory Board doesn't have any influence? Sounds like a problem to me."

Vote in our Motley Poll, and then scroll down to the comments section and let us know what prize the winner should get.

This article was originally published as Walk of Shame: You Be the Judgeon Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Why We Love Wild Penny Stocks

Penny stocks have hugepotential -- that's their blessing and their curse.

The potential rewards are enormous. In fact, pennies have been the best performers lately. Over the past 30 days, Quantum (NYSE: QTM), Timberline Resources (AMEX: TLR), and EntreMed (Nasdaq: ENMD) are all up anywhere from 80% to 100%.

Those quick doubles look like easy gains, considering that Priceline (Nasdaq: PCLN) and IBM (NYSE: IBM) would need to add $170 and $120, respectively, to their share prices to do the same.

Everybody loves pennies
It's the potential of quick gains in "cheap" stocks that keeps investors coming back. We typed "penny stocks" into Google , and the search engine spat out "about 1,680,000" hits. We did the same for more time-tested terms such as "blue-chip stocks" and "dividend stocks" -- the terms folks should be searching for in a bear market like this -- and got just 181,000 and 596,000 hits, respectively.

Sure, we expected a discrepancy, but the size of the gap was startling. It became even more interesting when we broke down those hits with Google Trends. According to Trends, penny stocks are particularly alluring to investors in Tampa, Miami, and Orlando -- the locales where the term is most often searched.

We hope the folks Googling "penny stocks" down there aren't retirees trying to cope with this crazy, crazy market.

This stock is set to take off! Or not.
According to the Securities and Exchange Commission, the term "penny stock" generally refers to low-priced (below $5), speculative securities of very small companies. To quote the SEC: " Investors in penny stocks should be prepared for the possibility that they may lose their whole investment." (It's worth noting that the emphasis in that last sentence is in the original.)

Pay attention to the SEC's entire definition, not just the stock price. Going solely on price would wrongly categorize billion-dollar companies such as Regions Financial (NYSE: RF) as penny stocks.

Regardless, the SEC is spot-on when it says that true penny stocks are among the surest ways to losemoney in the stock market.

Well, then, why do we love penny stocks?
We love penny stocks because they're fascinating. The world of pennies is inhabited by hardworking average Joes and Janes hoping to strike it rich, as well as by pumpers and dumpers, hypesters, and scammers. In pennies, the logic and reason that applies in the rest of daily life is replaced by zeal and prayer.

However, we don't love them enough to actually buy them. Yes, they have big potential, but their daily gyrations are unpredictable -- the stock-price movements have next to nothing to do with the underlying company the stock represents. In fact, trading in pennies is highly illiquid, and prices are often manipulated by forces not at all related to the business.

The dangers of incredible promises
If you're buying stocks without paying attention to the businesses you're buying, then you might as well be buying a lottery ticket. Or, to use another analogy, you might as well buy up every baseball card of a benchwarmer on the Akron Aeros Class AA baseball team and hope that he someday rises up, fulfills his potential, and becomes an all-star for the big-league Cleveland Indians.

There's a better way
Before you start saying the rest of the stock market is boring -- though you're probably not saying that any longer -- let us introduce you to some underfollowed small caps. They're nothing like penny stocks, yet they still offer some of the best returns in the market. Unlike penny stocks, promising small caps:

That's a starting point. There are more -- and more important -- criteria to help you find great small-cap companies. Our team at Motley Fool Hidden Gems , for instance, looks for a balance sheet with lots of cash and no debt, and a tenured CEO (or founder, if possible) who holds a substantial ownership stake in the business. In other words, we're looking for big returns with good old-fashioned bottom-up analysis.

You can view the 50-plus small caps our team has already found with a free 30-day trial. There's no obligation to subscribe, and we particularly recommend it for the penny-stock-o-philes reading in Florida. You know who you are.

Already subscribe toHidden Gems ? Log in at the top of this page .

This article was originally published July 27, 2006. It has been updated.

Tim Hanson and Brian Richards disagree about whether the U.S. Treasury should do away with the penny ... but the Treasury is probably busy with other issues right now. Neither owns shares of any company mentioned. Google is aMotley Fool Rule Breakers recommendation. Priceline is aStock Advisor pick. The Fool's disclosure policy is finger-lickin' good.

This article was originally published as Why We Love Wild Penny Stockson Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

Your Best Chance to Profit in 2009

If, after 2008, you still expect the stock market to fund your retirement, most people probably consider you a few Congressmen short of a bailout. (Zing!) Yes, it was tough being openly optimistic after a year in which every bull became a steer.

But there are a few perks -- like profiting from buying stocks at what could be some of the best prices you'll ever see.

A brief history of 2008
Last year was a fantastic demonstration of what happens when, in a highly leveraged world, everyone needs liquidity at the same time.

Anyone who borrowed to buy mortgage-backed securities needed cash when mortgage values plummeted. Investment banks like Morgan Stanley needed cash as the mortgage-backed securities on the companies' books began to fall. Retail banks like Citigroup needed cash to maintain capital ratios as defaults escalated. AIG needed cash to balance its losses in credit default swaps. Hedge funds needed cash to fund redemptions and reduce leverage when assets declined. American Express (NYSE: AXP), JPMorgan (NYSE: JPM), and Capital One (NYSE: COF) faced exploding default rates as consumers had trouble meeting their debt obligations.

An overreaction
That's not to say that the market collapsed simply because everyone cashed out. The problems in our economy are real. We've seen huge bankruptcies, the unemployment rate has risen to 10.2%, and consumer confidence remains low.

But the carnage in the market isn't limited to the shaky companies that are likely to suffer the most. The S&P 500 contains the biggest, most successful, and most stable businesses in America. Yet despite the recent market run-up, more than 82% of the companies in the S&P 500 are down from the start of 2008. Some 15% lost more than half their value!

Certainly, deteriorating business prospects are responsible for some of that drop. But based on valuations, it seems likely that stock investors sold because they had to. Like everyone else, they needed the cash.

And that's a really great thing if you're not one of Wall Street's forced sellers, because it means that someof those companies remain deeply undervalued -- for now.

The sweet spot
Large-cap value stocks could be the best way to exploit this opportunity. I'm not just talking about slow-growing companies trading at low single-digit earnings multiples, but also compellingly cheap growth stocks.

For instance, these days, the universe of large-cap value stocks includes eBay (Nasdaq: EBAY). eBay has a strong competitive advantage, $3 billion of net cash on its balance sheet, a 12% estimated annual growth rate going forward, and is trading for an enterprise value-to-free cash flow multiple of 12. At these prices, eBay is a large-cap value stock.

So why are large-cap value stocks a great investment these days? Not because these stocks are certain to outperform the other categories under all circumstances, but because they present the ideal trade-off between risk and reward in these troubling times.

While there's a good chance that the economy will continue showing signs of life this year, there's a possibility that things will get even worse. When you're betting your retirement, you should own businesses that can survive the worst-case scenario.

Low risk, high reward
Generally, large-cap stocks fit that criterion. They have the most stable cash flows, the most well-known brands, the greatest economies of scale, and the best chance of recovering from mistakes.

Would you put your money on Best Buy (NYSE: BBY) to withstand a depression, or Radio Shack (NYSE: RSH)? Would you bet on Amgen (Nasdaq: AMGN) or Discovery Laboratories ? These two examples may be somewhat hyperbolic, but it's absolutely true that powerhouses like Best Buy and Amgen are far more likely to survive than companies with smaller moats -- because they have the financial clout, the economies of scale, and the proven, winning business models.

In normal times, you'd really have to pay up for these sorts of dominant companies. But thanks to forced selling from investors struggling to raise cash, right now you can still find some excellent businesses extremely cheaply.

What's more, thanks to the poor economy, the earnings of these powerhouse companies have been depressed this year, which means that their normalized earnings multiple is even more compelling. Large-cap stocks are still cheap, and I believe they will offer superior returns over the next few years.

The Foolish bottom line
Of course, you still have to be careful -- as 2008 has shown us, you can't just throw a dart at the S&P 500 and expect to strike it rich. You still need to pay attention to balance sheets, and monitor how much cash companies are bringing in during these troubling times.

But if you're alert, you can find the stocks right now that will pay for your retirement. So now is a good time to start buying large-cap value stocks. If you're interested in ideas, our Motley Fool Inside Value team has identified the dirt cheap stocks that we think offer the most enticing combination of safety and upside potential. You can read our complete analysis with a 30-day free trial.

Already a member ofInside Value ? Log in at the top of this page .

This article was originally published Jan. 8, 2009. It has been updated.

Fool contributor Richard Gibbons knows all too well the pain of becoming a steer. He owns shares of eBay and American Express. Best Buy and American Express are Motley Fool Inside Value recommendations. Best Buy and eBay are Stock Advisor selections. The Fool owns shares of Best Buy. The Fool's disclosure policy wears a large cap to avoid sunburn.

This article was originally published as Your Best Chance to Profit in 2009on Fool.com

Copyright © 2009 The Motley Fool, LLC. All rights reserved.

View previous stories Current November 6, 2009 November 5, 2009 November 4, 2009 November 3, 2009 November 2, 2009 October 31, 2009 October 30, 2009 October 29, 2009 October 28, 2009 October 27, 2009 October 26, 2009 October 25, 2009 October 24, 2009

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