Time to be brave now...

The deep value stocks are in the most unloved business sectors. What is unloved more now than US financial companies? The subprime mortgage "crisis" and sinking greenback has only added to investor angst.

Many of these downtrodden stocks are now trading considerably below their book values-- a phenomenon not seen since 1990.

The secret to determining which companies will survive the downturn and then be valued fairly by the market (approximating their intrinsic value) is to find examples where:

1. leverage and interest coverage is less than competitors
2. credit write-downs (current and future) are less than competitors or factored into current share price
3. free cash flow is greater than competitors
4. there is a competitive advantage either through scale (i.e. Bank of America) or geographic monopoly/oligopoly (i.e. Banco Popular)
5. are small to mid cap companies that are not house-hold names (often ignored by traders, particularly during tough economic times)
6. have a dividend yield greater than or equal to the inflation rate so that you are paid to wait up to three years for the market to recognize the company's value or for the sector to rotate into favour by the "big money" or "smart money" (institutional investors).
   

Next post, I'll look at one company that I've been adding to my position: BPOP

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