FORTUNE Investor's Guide 2009
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Stock picks from the experts

The crash has driven prices so low that even extreme value investors see some safe buys.

By Geoff Colvin, senior editor at large
Last Updated: December 15, 2008: 7:55 AM ET

8 really, <i>really</i> scary predictions 8 really, <i>really</i> scary predictions 8 really, <i>really</i> scary predictions
Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market's sharpest thinkers and what they had to say about the future is frightening.

(Fortune Magazine) -- The stakes are high whenever you invest, but they're extra high when you're managing your money amid a historic financial mess and record volatility.

For advice equal to the task - in a setting chosen to inspire thoughts of security - we invited five champion fund managers to sit down inside a massive underground vault that's now part of a restaurant a block from Wall Street: Bob Rodriguez of First Pacific Advisors, who manages the FPA Capital and New Income funds; Susan Byrne, who heads Westwood Holdings Group; Leslie Christian, president and chief investment officer of Portfolio 21 Investments; Tom Forester, manager of the Forester Value fund; and Jeremy Grantham, chairman of asset manager GMO.

Fortune's Geoff Colvin led the discussion. Edited excerpts follow; stock prices are as of Dec. 1.

Let's get right down to business. Bob, you've held a lot of cash in recent years because stocks looked too expensive. Are stocks finally cheap?

BOB RODRIGUEZ: My value screen went to a new record low in June of 2007, and only 33 companies out of 10,000 qualified.

In January of this year we went north of 200 for the first time since the summer of 2002. We went to 250 in the Bear Stearns crisis.

And the week of Oct. 16, we hit 447 - the most qualifiers in more than 20 years.

So stocks are cheap by historical standards. However, we're being very cautious because what we're experiencing now is a major shift, the culmination of failed policies in the regulatory system and the private sector that have been building up for 30 years.

Susan, are stocks cheap?

SUSAN BYRNE: The markets are providing real returns for the risk that you take all along the spectrum, from equities to debt. So, yes, I think that prices reflect the fact that people are quite rightly very afraid of the risk in the stock market.

Jeremy, you've written that stocks will get cheaper.

JEREMY GRANTHAM: If you look back at 1982 and 1974, the market was much cheaper than it is today. In '74 it was about 40% cheaper, and in '82 it was about 60% cheaper. Look at the bad times we had in '74 and '82, and I think several of us would conclude that this time is likely to be as bad - possibly worse. Bubbles like this always overcorrect.

How bad will you feel if you put in your cash reserves and the market continues to go down? You're going to feel awful. And how will you feel if you don't buy in the cheapest market for 20 years and it runs away and leaves you? Horrible. You have to step your way through so that the regret, which is going to be huge anyway, is about neutral.

Leslie, your fund focuses on green investing. That can be defined in many ways. What does it mean for you?

LESLIE CHRISTIAN: We believe that the most certain risks facing the economy are ecological limits. So we seek companies that are taking susbstantive actions to be prepared for both the crisis and the opportunities that will come with issues like running out of natural resources and facing limits on how much we can emit into the atmosphere. Our stock selection is still based on knowing that once we get through this financial meltdown we are going to face the same old problems with respect to the environment.

So what companies do you like right now?

CHRISTIAN: We've just added ABB (ABB) (ABB, $12), a Swiss company that is involved in electricity distribution and grid upgrades. We own some of the larger renewable-energy companies like Vestas (VWDRY) (VWDRY, $14), EDF Energies Nouvelles (EEN.FP) (EEN.FP, $30), and EDP Renovaveis (EDPR.PL) (EDPR.PL, $6).

And we own some companies involved in solar energy. Interestingly, the largest manufacturer of solar panels in the world is Sharp (6753.JT) (6753.JT $7). We own Sharp, Suntech (STP) (STP, $8), and SunPower (SPWRA) (SPWRA, $29).

Bob, some years ago you said that the price of oil and energy in general was going to go way up, which obviously it did. Now that it's down again, where do you stand?

RODRIGUEZ: This recent collapse is very temporary. We've been waiting for prices to come down, and we finally started buying Oct. 8. We put in approximately 25% of our cash between Oct. 8 and Oct. 23, and of that, about 70% has been into energy.

In the service and equipment area, we're adding Patterson-UTI (PTEN) (PTEN, $10), Ensco International (ESV) (ESV, $28), Rowan Cos. (RDC) (RDC, $14), and BJ Services (BJS, Fortune 500) (BJS, $10). Over on the exploration and production side we've established a new position in Newfield Exploration (NFX) (NFX, $19), which is down approximately 70%. We assess the value at mid-40s to $50 a share.

Beyond energy, we've also deployed some capital in technology. Avnet (AVT, Fortune 500) (AVT, $14) has come down from approximately $40 a share and is selling at about 50% of book value. It has a market cap of approximately $2 billion, and in the last recession it threw off $1.7 billion in free cash flow. Arrow Electronics (ARW, Fortune 500) (ARW, $13) threw off nearly $2.3 billion. In recessions both companies throw off cash flow because their working-capital demands come down.

Susan, what are your themes, and what are you buying?

BYRNE: Our theme is high-quality, low-debt, dividend-paying companies that sell at less than a market multiple, which are getting more difficult to find because the market multiple is down. That's led us to some technology names and kept us in some of the energy names.

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
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