Once upon a time, a madman hyped these things as if they would go up forveer. Hedge fund after hedge fund bought the story and these four stocks skyrocketted to lofty valuations. Amazon.com surpassed $100 for the first time.  This led to Bill Miller look like a genius. When Google would post great earnings, analysts quickly jumped on the band wagon and quickly raised their price targets to $700+. The same goes for Apple and Research In Motion.

Of course, the madman got out right  pretty close to the top. But how about those individuals who bought at the hype. Unless they sold, things havent gone so well.  The 4 donkeys (love their products thoguh) are now trading  near their 52 week lows.

Yahooooo!

Once upon a time, Yahoo was considered “undervalued”.  It traded at higher valuations than Google despite Google growing at a faster clip and gaining market share. Many thought someone like Microsoft could jump in, buy Yahoo, monetize traffic (yahoo has high traffic but does not take advantage of it) and would this give the stock price a boost. That boost came when the infamous Carl Icahn jumped on board and the stock hit $30 as many funds thought the deal with Microsoft might go through now that icahn is on board. Management gets greedy and wants  a higher bid from Microsoft in hopes of starting a bidding war. Microsoft holds its grounds (ok they gave ground once) and soon investors realise how bad Yahoo’s management really is. Icahn’s buddies start to panic. Icahn pretty much givesup. Stock falls, falls, falls and falls.  Where is it now? $30? $20?$15!…how about a cool $13.

Same could be said for Dell currently $13! P/E 10 with Forward P/E of 8

A particular Warren Buffett quote reminds me that doing nothing is good:

“”I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”-Warren Buffett

With 14% cash on hand, its tempting to get into some positions. Especially Microsoft which has been climbing the magic formula list this past week as it hits new lows. I continue to tell everyone I know that the magic formula has to be among the most undervalued books/sites/investing system around. Where else can I find a screen that looks for great businesses at a discount. Its only a matter of being patient and sticking with the system. For many years studies have proven that low P/E’s outperform the market, but investors/speculators continue to invest in companies that are trading at sometimes catastrophic P/E’s. Companies with high P/E’s are usually dangerous in this type of market as analysts expect companies to deliver outstanding numbers. What happens next? The company delivers great numbers (usually double digit growth ) but the stock gets pummeled (i.e. AAPL, GOOG,MSFT). How do low P/E’s fare during earnings season? Good. David Dreman highlights this in the book. Expectations for these companies are so low, no matter what kind of numbers the company reports, chances are a) a positive earnings surprise will make the stock soar (WFC)  or b) the news has been priced in already.