Now he’s doing it all over again…

In a guest column in the New York Times, Buffett admits he is buying American stocks with his personal money, which was previously tucked away in government bonds. Soon — if Buffett feels that prices will remain attractive — all of the Oracle’s non-Berkshire net worth will find its way into U.S. stocks.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Buffett writes.

We agree…it’s time to get greedy. We’re seeing some cheap stocks out there in Pennyland. And today, we’re going to discuss the best way to find the stocks most likely to surge when the economic outlook brightens…

In last year’s letter to shareholders, Buffett explained that he looks for businesses that he can understand, have favorable long-term economics, able management, and a sensible price tag. If you want to play off of Buffett’s strategy, the first thing you’ll want to look for is a business model you can count on.

Understanding what you own is an essential part of investing. During the tech bubble, as Internet companies grew at an impressive clip, Buffett stayed away simply because he didn’t understand their business prospects. The decision turned prophetic when the bubble burst and online companies went belly-up one by one.

Valuation is equally important. Over the course of the last several months, countless companies have seen their share prices trampled for no real reason at all — just look at Neenah Paper (NP: NYSE), a small-cap paper manufacturer that saw its share price slide 55% in spite of otherwise solid fundamentals.

If you’re looking for solid penny stock plays, another thing to keep in mind is cash. With credit markets still on shaky ground, companies with enough money to stay the course through tough times have a serious liquidity advantage over those who need to borrow to keep afloat.

What should you look out for? Well, Buffett has advice on that too…

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines…if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down,” explains the Oracle of Omaha.

Today, there are plenty of companies out there that meet Buffett’s investment criteria. Like Neenah Paper, the company whose price fell for no real reason, there are stocks like chip-maker Silicom (SILC: NASDAQ) and chemical manufacturer Buckeye Technologies (BKI: NYSE) both of whom have solid fundamentals and P/Es under 6.

Even though the markets have been anything but kind to investors lately, fearful investors are making a good case for buying up some undervalued penny plays. The time to get greedy is now.

Regards,
Greg Guenthner & Jonas Elmerraji

October 22, 2008

P.S.: In our current issue of Penny Stock Fortunes, we’ve found another company that is not only undervalued in the current market, but whose entire sector is poised for a huge comeback.

Greed Pays Off When Appropriately Timed was originally featured in the Penny Sleuth.