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3 Dirt Cheap Stocks For This Plummeting Share Market

Look out below…

Oil down to a five year low, with West Texas crude plunging to around $US60 a barrel.

Stocks down, overnight the S&P 500 index sinking its most in seven weeks.

Consumer confidence down, tracking at its lowest level since August 2011, dragging retailers like Premier Investments Limited (ASX: PMV) and Super Retail Group (ASX: SUL) down with it.

BHP Billiton Limited (ASX: BHP) down, the ASX shares today trading as low as $28.40.

Oil stocks down, smacked hard, again, including my junior Canadian oil producer, following yesterday’s massive 37% gain with a 16% tumble. I won’t be checking my brokerage account today!

No respite either for Santos Ltd (ASX: STO), its shares down another 6% despite the company announcing a 25% reduction in its 2015 capital expenditure, and saying it has no plans to raise equity at these low share prices. Santos shares are now down more than 50% in 2014.

The S&P/ASX 200 Index down, at one stage losing another 1% today, at the time down almost 3% in 2014. Thanks for nothing, Mr Market.

Looks to me like it’s the perfect time to roll out the scaredy cat image, and message.

When markets are fearful, there’s simply no place to hide.

It’s not fun watching your portfolio tumble. I feel your pain.

Yet, it’s EXACTLY at times like these you need to decide whether you want to make the BIG money that’s on offer, or whether you’re just a GREAT BIG scaredy cat.

scaredy-cat 2

 

As you’ll read a little further down, the timing could be perfect, given Scott Phillips is about to reveal his top Three ASX Best Buys Now stocks, exclusively to Motley Fool Share Advisor subscribers.

Like me, Scott loves a bargain, and with markets scared and falling, there’s arguably no better time to be buying. Click here now to sign up to Motley Fool Share Advisor, save 60% off, and get Scott’s top three ASX buy recommendations, hot off the presses.

Regular readers of our Motley Fool Take Stock email will know, even in the darkest days, when the clouds are at their darkest, I can find silver linings.

Let me see…

The case for lower interest rates keeps building and building and building. Lower interest rates not only stimulate economic growth, but by comparison, make equities, and dividend yields look very attractive.

A lower stock market means the shares of individual companies are cheaper, and their dividend yields are higher.

Lower interest rates means an even lower Aussie dollar, which helps our exporters, especially our miners.

Lower oil prices means lower petrol prices which means more disposable income in the hands of Australian consumers, which they can use to spend at the shops.

What’s the risk?

Even lower share prices.

I get it.

No one likes to buy a carton of Crown Lager at $50 only to see it on special at $45 the next day.

No one likes to buy a stock at $3.32, only to see it now trading at $2.90. That 12.5% share price haircut more than cancels out the now 5.9% fully franked dividend.

That’s exactly my family’s situation in a recent investment we made in a company called Flexigroup Limited (ASX: FXL).

A financial services company, Flexigroup are the outfit behind a range of interest free loans you see and hear advertised at retailers like Harvey Norman Holdings Limited (ASX: HVN).

Given the state of the economy, and the low levels of consumer confidence, it’s not surprising Flexigroup shares have been caught up in the woes of the retail sector.

The easy option is to hold on to my shares and wait for a recovery. The retail sector may be doing it tough now, but if there’s one thing you can always count on, it’s the resilience of the Australian consumer.

The worst option is to sell out now, just because the share price has fallen, and might fall further. Sure, if you think the business is permanently impaired, never to grow again, head for the hills. There’s nothing worse than hanging on to shares in a company that’s in permanent and secular decline — Myer Holdings Ltd (ASX: MYR) anyone?

I should point out Flexigroup is a growing company, not a contracting company.

It recently raised its dividend by 15%. It is forecasting underlying earnings growth, albeit it at a modest 6%, although that growth rate is arguably already baked into the Flexigroup valuation, trading on a P/E of less than 10.

Given all the above, the rational decision is to buy Flexigroup.

There is a margin of safety. The odds are in your favour, given the low valuation, and the juicy fully franked dividend yield.

I’ll let you into a little secret.

Flexigroup is a current buy recommendation for Motley Fool Share Advisor subscribers. Don’t tell Scott Phillips I let the cat out of the bag. He’ll never know.

TS 11 Dec 14

As to whether it’s a Best Buy Now stock, like you, I’ll have to wait until after the market closes today. That’s when Scott Phillips will be releasing his brand new Three ASX Best Buys Now stocks, exclusively to members of Motley Fool Share Advisor.

I have no insight or knowledge of which three stocks, out of a total of more than 20 stocks he currently rates as a buy, Scott Phillips will pick today. What I do know, however, is he’ll have plenty of top quality companies trading at modest valuations to choose from.

Like myself, Scott embraces volatility, for although it may bring some heartache, it does bring cheaper share prices. It’s in such an environment that Scott likes to do business.

I don’t know if the next stop for the ASX is 5,000 or 6,000.

If it’s the former, I’ll be ready to pounce, adding more, cheaper stocks to my portfolio. If it’s the latter, I’ll be cheering my existing portfolio higher.

A win-win situation?

Depends on whether your glass is half full or half empty. If it’s the latter, with the greatest respect, I’d suggest gold, cash, bottled water and baked beans are your best bet.

For me, it’s stocks, whatever the market. Let me count the ways…

1) You receive tax-effective income via fully franked dividends.

2) You stand to make significant capital gains, over time.

3) You get the challenge of trying to beat the market.

4) You get the stimulus to keep your mind healthy into retirement, and way beyond.

I’ll close with two more dirt cheap stocks on my radar. These are NOT Motley Fool Share Advisor recommendations, and nor do I hold them myself… yet!

The first epitomises the terms “dirty value, special situation and distressed investing.”

At a share price of around 16 cents, Vocation Ltd (ASX: VET) is priced for bankruptcy, something that’s unlikely, given the company’s balance sheet.

Even if Vocation do underperform on earnings guidance, the stock is still cheap. Reversion to the mean could see the shares multi-bag from these low levels. That said, this is not a risk-free investment.

The second is exposed to the oil price, and as such, faces the very real threat of a downgrade to earnings. Still, much of that is arguably already priced into the shares of MMA Offshore Ltd (ASX: MRM), the company formerly known as Mermaid Marine.

Adding to the case, Argo Investments Limited (ASX: ARG) recently revealed they made a decent sized investment in the company, presumably at much higher prices than prevail today.

At $1.14, MMA Offshore trades at 0.64 times its net asset value, at 4.5 times its trailing earnings, and on a trailing fully franked dividend yield of 11%.

More times than I wish to remember I’ve been in too early on such situations.

Just when you think the oil price, and the share prices of oil-related companies can’t fall any further, they usually do. And cheap stocks can suddenly look expensive if earnings crater and the dividend is suspended.

One way to play such special situations is to buy in thirds.

If you were looking to invest say $6,000 in a position, spend $2,000 now, commit to spending a further $2,000 in one month’s time (so long as the business has not deteriorated), and commit to spending another $2,000 in three month’s time, again presuming there is no deterioration in the business.

It’s an idea I just might take myself up on, when the Motley Fool’s strict internal trading rules allow me to — from Tuesday onwards next week.

Watch this space.

DID YOU KNOW... The Motley Fool's top analysts have just completed a brand-new free report on their top pick for 2015. Be among the first to get the name and code right now. (Hint: It's a sexy ASX tech company!) Simply click here for your FREE copy... BEFORE the investing crowd gets wind of this!

Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton and Flexigroup.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

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