Great Stocks the Market Fears

Nassim Nicholas Taleb's best-selling book The Black Swan is probably loaded with more good advice than any other single source available. Read the book a few times, and you'll have a better understanding of risk and uncertainty than the vast majority of fancy-pants financial experts.

One common theme from the book is focusing on the ability to separate the empirical from the emotional. Sifting out the noise from the numbers -- the significant developments from the total ballyhoo. It's one of the most important lessons to remember.

Especially in a market like this, where fear, uncertainty, and raw emotion are in the driver's seat. More investment opportunities are being created from market temper tantrums than we've seen since the Great Depression. The trick to finding great investments -- and the kind of behavior that's made investors like Warren Buffett madly successful -- lies in shoving aside emotional barricades and focusing on the empirical facts. It's anything but easy, but the results are rarely disappointing.

To find a few stocks whose empirical details far outweigh their emotional fears, I called on the wisdom of our 135,000-member-strong CAPS community. In my opinion, these three stocks have too much fear and too little fact baked into their current prices:

Company	1-Year Return	Recent Share Price	Forward P/E Ratio	TTM Return on Equity	CAPS Rating   (5 max)
ConocoPhillips (NYSE: COP)	(54%)	$40.31	6.5	(28.1%)	*****
Goldman Sachs (NYSE: GS)	(15%)	$143.21	10.0	4.3%	**
Waste Management (NYSE: WMI)	(25%)	$26.78	12.2	17.4%	*****

Source: Motley Fool CAPS, Google Finance, and Yahoo! Finance, as of July 9.

A closer look at Goldman Sachs
Goldman Sachs is in a funny position: It's by far the best company in by far the worst industry. It's as if LeBron James were suddenly drafted to a prison basketball team. Would he still be considered great? Maybe, but he'd be lumped in with competitors whom people want to throttle. Nonetheless, he'd probably look greater on a prison team, if only because he'd be spectacularly dominant.

And that's what Goldman is -- a phenomenal bank wrapped up in the hullabaloo of failed competitors.

Now, I've been decidedly pessimistic on banks for a while now. It's an easy stance to take these days, I'm aware. So what's different about Goldman that makes it a worthwhile investment?

There are two types of financial crises. One is a solvency crisis, or when your assets don't cover your liabilities. The other is a liquidity crisis, in which you're wholly solvent but lacking readily available cash.

Goldman was always in the second batch. While banks such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) had legitimate solvency concerns, Goldman was purely strangled by a liquidity crisis. And don't kid yourself -- it was a crisis. There was a time last fall when it looked like Goldman might meet a quick demise. This was because its business model relies on regularly turning over large amounts of short-term debt. When the short-term debt market got nuked, Goldman could have run out of cash (a liquidity crisis) in no time flat.

But those days are gone for one reason: Goldman -- along with Morgan Stanley (NYSE: MS) and American Express (NYSE: AXP) -- are now bank holding companies. As a bank holding company, Goldman can borrow from the Federal Reserve when it needs to, purging the prospect of another liquidity crisis. Goldman's position is further reinforced by noting that measures of liquidity strain are generally back to normal levels.

So Goldman isn't going to die. Wonderful. But how will it thrive? Here's how CAPS member Gmoney91 put it:

Goldman Sachs has many things going in its favor. First, it is in an industry where many of direct competitors have gone by the [wayside]. With little competition, Goldman can charge higher prices, while also gobbling up the business left by its former competitors' void.

It really is about that simple. That's why its recent earnings have been off the charts. Goldman has always been the top investment bank. Now it's the top investment bank, with considerably less competition. Even in a terrible economy, that's a wonderful position to occupy.