Much like a roller coasters, the stock market produced plenty of action in 2011. And though I really like adventure rides, the recent action in stocks has brought a few too many sharp drops and loop de loops. The stock market, just like roller coasters, ended the year right where it started.

What about 2012? Well … we know that politics in Europe and the U.S. will continue to be front and center for a while. But unknown events will also come into play–some good, some not so good. And I think we can expect the U.S. economy to continue to struggle, while some emerging economies such as Brazil will do well.

My conclusion: the 2012 U.S. stock market will be similar to 2011, with lots of ups and downs. So strap yourselves in and get ready for a great ride. I would be a lot more negative if I let the front page news sway me, but I believe the foundation for stock market values is built on the outlook for sales, earnings and dividends rather than political banter, bickering and grand-standing.

Read the rest of Roy’s thoughts in today’s Cabot Wealth Advisory.

When the Chips Are Down the Herd Moves On

Nice illustration. But what does it mean? Recognizing that the phrase “when the chips are down” is from poker, and that it refers not to the time when the bets have been placed but to the time when your stack of chips has dwindled–when losses have been more prevalent than wins-it means that prolonged losses will cause the mass of common investors to abandon stocks. And that’s what creates bargains for patient value-oriented investors who can see beyond the troubles of the present.

And why is this worry a good thing?

Because, as all experienced investors know, bull markets climb a wall of worry!

And that’s what this bull market is doing now!

As a result, I’m more optimistic than at any time in the past few months, about both the short- and long-term prospects of the market.

And I’ve got a great stock to recommend to you!

It’s in the insurance business, which seems appropriate following the previous section on dogs.

Its name is Reinsurance Group of America (RGA).

And Roy Ward, the editor of Cabot Benjamin Graham Value Letter, recently recommended it. He wrote:

“Reinsurance Group of America (RGA) is the second largest provider of life reinsurance in the U.S. Reinsurance Group also offers annuity, critical care and group reinsurance. The company guarantees insurance contracts for insurance and other financial companies and sells its products in 25 countries around the world. The company also sells life and disability insurance to consumers in the U.S., Canada, and abroad. It has over $2.6 trillion of life reinsurance in force backed by a strong balance sheet with conservative bond investments.

“Reinsurance Group is in position to capitalize on the significant growth opportunities in the U.S., Canada, India and China. Revenues increased 1% and EPS rose 19% during the last 12-month period, spurred by improved market conditions and higher prices. We believe strong growth from its international operations as well as a boost from recent purchases will drive EPS higher by 6% during the next 12 months.

“RGA’s shares are clearly undervalued at 6.8 times current EPS with a 1.4% dividend yield. RGA shares sell at a huge 42% discount to current book value. The balance sheet is strong, enabling RGA to take advantage of additional opportunities in the reinsurance industry. Higher interest rates could add significant income from RGA’s conservatively invested bond holdings. We fully expect RGA’s stock price to increase to our Minimum Sell Price of 77.52 during the next one to two years. RGA is low risk.”

Sounds good to me. And I can add a few more details.

First, Roy has added the stock to his Classic Value Portfolio. This portfolio, composed of eight select holdings, has gained 28.2% in the past 24 months, compared to 16.8% for the Dow. Longer-term, the portfolio is up 173% since inception in November, 2002, compared to just 35.4% for the Dow.

Second, RGA had been trading as high as 64 back in July, so getting it at the current price is like getting a 22% discount.

And third, financial stocks were among the hardest-hit sectors this year, so stocks like RGA have a lot of upside potential.

For conservative, patient investors, I recommend it highly.

Even better, I recommend that you consider a no-risk trial subscription to Cabot Benjamin Graham Value Letter, so that you can get updates on RGA and other undervalued stocks every week!

For more details, click here.

Last Saturday, I discussed five growth stocks that could benefit from holiday shopping. Today, I’ve got five value stocks that have been featured in Cabot Benjamin Graham Value Letter and could see a boost when consumers open their wallets.

Without further ado …

Bed Bath & Beyond (BBBY): Bed Bath & Beyond is benefiting from both sides of the recession: with people hunkering down at home more, they’re spending money to improve their nests … and as people re-enter the workforce after long bouts of unemployment, they’re spending some of their newfound incomes on home improvement. The company sells an assortment of everyday low-priced domestic goods and home furnishings, as well as other items, through its Bed Bath & Beyond, Christmas Tree Shops and buybuy BABY stores. The company operates 1,142 stores in all 50 states plus Puerto Rico and Canada. Although its locations are spread out over a wide geography, Bed Bath & Beyond aims to supply its stores with goods that fit regional climate and demographics, a strategy that has proved profitable. The company has a strong balance sheet, which should support future expansion.

GameStop (GME): GameStop is the top retailer of software, hardware and game accessories for video game systems made by Sony, Nintendo and Microsoft. Even more important during these rough economic times is the fact that GameStop is the largest reseller of user video games and PC entertainment software. GameStop has 6,670 locations in 17 countries and sells products through its website. The company is focused on developing its distribution of downloadable content, which surged a huge 60% in 2010 and is expected to rise 50% a year for the next four years. Downloadable content is the way of the future, so this focus should serve the company well for years to come.

Kohl’s (KSS): The same trends that are driving the dollar store segment higher are working in Kohl’s favor as well. The company operates specialty department stores that feature national, private and exclusive brand merchandise priced to provide a good value to customers. The company’s private and exclusive brand goods make up 48% of sales and shield it from the competition. Kohl’s has just over 1,000 outposts primarily in the Midwest, Mid-Atlantic and Northeast areas of the U.S. selling quality apparel, shoes, accessories and home goods to middle-income consumers seeking value and convenience. Kohl’s, which initiated a dividend earlier this year, has seen website sales grow in recent months.

Nike (NKE): I’ve written a lot about Under Armour (UA) and I still believe the company has a lot of growth ahead. However, long before Under Armour even existed, Nike was paving the way for the industry both companies would later inhabit. Despite Under Armour’s success in the sports apparel industry, Nike is still the big dog in town. The company is the top seller of footwear, apparel and accessories for athletic and recreational activities. Nike sells its products to 23,000 retail accounts in the U.S. and in about 170 other countries, giving it broad global exposure. New golf products and women’s footwear are just two areas that have provided growth for the company in recent years, giving Nike a strong balance sheet with which it can continue to expand. Exposure to the fast-growing emerging markets and the 2012 Olympics should provide growth.

Ross Stores (ROST): Ross sports a story similar to Kohl’s and is benefiting from the same trend towards value and convenience. The company operates over 1,000 stores in 27 states and Guam that sell apparel, shoes, jewelry and home furnishings. Ross offers brand-name merchandise at 20% to 60% below regular department and specialty store prices by scooping up manufacturers’ cancelations and overruns. The company’s strategy is to keep low in-store inventories to boost turnover and reduce the need for further discounts. Ross has plans to expand into new areas and the lagging economy should send more consumers its way. And just last week, Ross reported its 11th straight quarter of profit growth, indicating that discount-seeking shoppers are still flocking to the retailer.

To get full write-ups, including specific buy and sell prices, on the stocks mentioned above and other high-quality value stocks, check out Roy Ward’s latest recommendations in Cabot Benjamin Graham Value Letter.

I am not an accounting professor by any means, so I’ll keep this simple. Every public company issues a balance sheet whenever sales and earnings are reported, which in the U.S. is always quarterly. Every balance sheet is divided into two sections: (1) Assets and (2) Liabilities and Shareholders’ Equity. One of the best ways to ascertain a company’s quality is to compare the book value per share to the stock’s current price.

I find that a lot of investors are unfamiliar with book value and book value per share, so, let’s at least become familiar with these terms. Book value is shareholder’s equity or retained earnings, which is a number found near the bottom of a company’s balance sheet. Book value per share is simply the shareholder’s equity or retained earnings divided by the number of common shares outstanding. (Price-to-book value can also indicate whether a stock is undervalued.)

Is book value per share important? By itself, no. But when compared to the company’s stock price, it’s enormously important. In short, quality companies with low price-to-book value per share ratios (P/BV) have outperformed companies with high ratios for the past three-, five- and 10-year periods. I recently scoured my databases to find the best companies with low P/BV ratios. I used several criteria to make my selections, narrowing the list of companies by also requiring: Value Line Financial Strength ratings of B++ or better, low price-to-earnings (P/E) ratios, dividend yields of 1.0% or higher and good earnings prospects for the next 12-month and five-year periods.

My search turned up investment choices quite different from companies appearing in most other investment advisories. I discovered six solid companies with low price-to-book value ratios selling at bargain prices, two of which are discussed below. You can find my analysis for the remaining four companies in the latest issue of my Cabot Benjamin Graham Value Letter.

Abbott Laboratories (ABT) is a very solid company with a reasonable stock price and an above average dividend.  The company is performing quite well with the help of strong sales in emerging markets and recent acquisitions. Sales will increase 6% and earnings will likely increase 10% during the next 12 months. Abbott’s price-to-earnings ratio, based on next 12-month earnings per share, is 10.7, which is quite reasonable. Earnings will continue to increase at a 10% pace in future years.

Abbott has paid dividends in every quarter since 1924 and increased its dividend every year since 1971–an amazing record indeed. The dividend yield is now 3.6%. Abbott’s price-to-book value ratio is 2.79, which seems high, but is fair for a leading company in the health care industry.

And there’s more. Abbott will split into two separate companies before the end of 2012. I believe the two companies will be worth more than the current company, and investors who wait will be justly rewarded!

Drug stocks, in general, have lagged the stock market in 2011, but lately investors are beginning to notice the low price-to-earnings ratios, high yields and steady earnings growth. I recommend buying ABT at or below 52.97, and selling when its stock price increases to 72.97.

Fred’s Inc. ‘A’ (FRED), founded in 1947 in Memphis, sells discount merchandise from 678 stores in 15 states in the Southeast and Midwest. Stores offer household goods, pharmacy items, food, pet supplies, clothing and linens. Average store size is modest, about 14,400 square feet.

Fred’s offers a large selection of generic drugs, which are in high demand and highly profitable. I expect sales to increase 5% and earnings to rise 12% during the next 12 months. The retailer has added pharmacies to half of its stores and is working to add pharmacies to most of its remaining stores.

FRED shares are undervalued at 12.8 times forward earnings per share and at 0.92 times book value. The dividend yield of 2.0% is decent. I expect the strong demand for merchandise offered at low prices to continue during the next several years. I advise buying FRED at or below 13.00 and selling when the stock price hits 19.61.

I will continue to follow stocks offering investors good value in my Cabot Benjamin Graham Value Letter. My next issue, coming soon, will focus on undervalued stocks with low P/E to growth (PEG) ratios.  I hope you won’t miss it!