The Templeton Trade's Time Has Come

It is starting to look like it is time to put on the Templeton trade. In 1939, a point of maximum pessimism in the U.S. as the war in Europe expanded and the effects of the depression still lingered. A young John Templeton borrowed $10,000 and invested in shares of all the stocks on the NYSE that traded for les than a dollar. In 2002, the trade was available again. I tested (and used to pick stocks) a system back then that just purchased all the stock under $3 on the NYSE. That portfolio doubled even as the market decline continued. We have reached the levels of price decline and pessimism that make this trading and investment opportunity worth exploring again.

According to my screen, there are 145 companies that qualify right now. As you would expect, financial companies are well represented. However there is a broad range of industry groups on the list besides the financials. Groups like funeral services, communication, agricultural and auto companies are also on the list. Fifty-three of these companies have turned a profit in at least two quarters this fiscal year. I would focus on these, unless you are a huge risk taker and want to gamble on the financial companies on the list. It is worth noting that some large successful hedge fund managers have done exactly that.

There are companies on the list that could provide the type of healthy gains like those seen by Sir John. Chemtura Corporation (CEM - commentary - Cramer's Take) shares have dropped over 70% this year, as investors are worried that the global slowdown will hurt their ability to service outstanding debt.

The company is the largest supplier of pool chemicals in the world. They also have operations that provide chemicals to the agricultural industry where demand is still growing. As recently as August, an analyst at Standard and Poor's said he saw sales growing in most of the company's product limes this year. He rated the shares a buy and had a price target of $10.

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At the time of publication, Melvin had no positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.