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In recent months, the markets have been a drawn bowstring. Investors, frightened by the technology meltdown, the recession, possible terrorist attacks, Enron-like scandals and the Iraq war buildup, sold their stocks and put their money in Treasury bonds. As a result, stocks are 25% too cheap, Treasury bonds are too expensive and oil prices were pushed far too high. This is a terrific opportunity for stout-of-heart investors to make some money. Last week, when U.S. troops finally moved into Iraq, investors stopped to realize that the world is not ending and that stocks are very, very cheap. Stock prices jumped 10% in a week--their biggest seven-day gain since the Great Depression. Treasury yields fell like a stone, and oil prices dropped sharply. Don't sell your stocks yet. There is plenty of fuel left in this rocket. Stocks are still under-valued--by 40% for companies in the health care, telecom and utilities sectors. Markets are thin and prices are volatile, so don't expect a smooth ride. But in our approach, if a stock or a sector is selling far below its intrinsic value, you should own it. In health care, we recommend the Ishares Dow Jones U.S. Healthcare (amex: IYH - news - people ) exchange-traded fund or blue chips like Johnson & Johnson (nyse: JNJ - news - people ), Eli Lilly (nyse: LLY - news - people ), Schering-Plough (nyse: SGP - news - people ) and Bristol-Myers Squibb (nyse: BMY - news - people ). In telecom, we'd go with Ishares Telecommunications ETF (amex: IYZ - news - people ), Verizon (nyse: VZ - news - people ) or Alltel (nyse: AT - news - people ). And in utilities there's iShares Utilities ETF (amex: IDU - news - people ) and FPL Group (nyse: FPL - news - people ). Here's how the math works. If you buy stocks that are on average 25% undervalued, like the S&P 500 today, you hope to make money in two ways. First, you will capture the capital gain as the stock prices move back to intrinsic value. This could take as long as two years to happen, based on our research. Second, you earn a modest increase in intrinsic value--about 7%--every year as the companies grow over time. Together, they add up to great returns. Over a three-year period, $75,000 invested in the S&P 500 at today's prices should be worth about $114,000, a 53% total return over the two years. Pretty good pay. All that is without figuring in a tax cut. As I wrote in this column Jan. 9, implementing the president's full dividend tax cut would add 20% to the intrinsic value of the stock market. We would see substantial further gains down the road for companies that adapt to the new tax rates by initiating dividends, as Microsoft (nasdaq: MSFT - news - people ) did in January and IHOP (nyse: IHP - news - people ) did earlier this week, by announcing special dividends or by issuing stock to repay expensive debt. Even half a tax cut, like the version the Senate passed March 25, would be worth at least a 10% increase in stock prices--an additional $480 billion in net worth. Many of the pros I know are worried about the risk of missing the rebound of stock prices; they are loading up on equities. Don't sell them your stocks at today's bargain prices.
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