These stable, growing companies are probably as cheap as they will ever be. Don’t let the feeble economy keep you from owning them. By Steven Goldberg, Contributing Columnist September 7, 2010 No matter how bad the economy gets, people won’t stop drinking Pepsi. They won’t stop nibbling Lay’s. And they won’t stop eating Quaker Oats cereals. SEE ALSO: Our Special Report on Investing in Volatile MarketsYet PepsiCo (symbol PEP), which markets those world-class brands and a host of others, trades at 15 times estimated earnings for the next 12 months -- as cheap as it has been for a decade or more. Dozens of huge, high-quality companies with growing and virtually unassailable global franchises trade at similar bargain prices relative to earnings. Coca-Cola (KO) trades at 16 times estimated earnings for the next 12 months. Johnson & Johnson (JNJ) sells at a price-earnings ratio of 12, Clorox (CLX) trades at 14 times earnings and Microsoft (MSFT) changes hands at a P/E of 10. Advertisement In general, the products and services these companies offer are impervious to recessions. Moreover, consumers in rapidly growing emerging markets are already demanding more and more of them. “I drool at Pepsi,” says Don Yacktman, co-manager of the Yacktman Fund (YACKX), which has more than 8% of its assets in the consumer-products giant. Yacktman also owns big helpings of the other stocks mentioned above. “I haven’t seen a period at least since the early 1990s when so many above-average companies have traded at below-average prices,” he says. Yacktman has seen many different markets. At 68, he has been investing for a living for 42 years. “What I’ve learned over the years is to not try to predict the market,” he says. “Instead, regardless of where the market is, look for the bargains, look for the outliers.” Yacktman, his son Stephen, and Jason Subotky manage the fund from Austin, Tex. Performance has been spectacular. Over the past ten years through September 3, the fund returned an annualized 12.1% while Standard & Poor’s 500-stock index lost an annualized 1.3%. Yacktman’s trademark has always been investing in high-quality, large companies when they’re temporarily out of favor. Today many of the best companies are selling for a song. Advertisement Another fund with promise Just outside Portland, Ore., Robert Zagunis and his four co-managers are singing from the same hymnal as Yacktman. Indeed, Jensen Fund (JENSX) owns all the Yacktman picks listed above. “Ten years ago, stock valuations were a little cockeyed,” Zagunis says. “Since then, the high-quality companies have continued to perform. Today they might be twice as big as they were then, but they have maintained their returns on equity, and their stock prices haven’t moved.” (Return on equity, or ROE, is a measure of a company’s profitability.) Jensen doesn’t have the shining record that Yacktman does. Over the past ten years, it has returned an annualized 2.3%. The managers employ a simple screen to identify companies for further investigation -- specifically, they look for companies with at least ten straight years of ROEs of 15% or more. Normally, I wouldn’t think much of such a simple approach. But it has led the Jensen team to the stocks that I think are most attractive in today’s market. These highly profitable companies are irresistible bargains. “I don’t understand the lack of interest in these great companies,” Zagunis says. Advertisement Only about 150 companies pass through Jensen’s initial screen. The Jensen team then looks for companies with low debt and that trade at a big discount to their estimate of a company’s intrinsic, or true, value. Dividends and share buybacks aren’t essential, but Jensen frequently finds them in companies that Zagunis describes as having “redundant cash flow. They’re in a different category than other companies.” Jensen employs a rigorous investment process. The managers typically spend months studying a company, and they won’t buy any stock before visiting the firm and getting to know its management. A few other top Jensen holdings: Abbott Laboratories (ABT), Oracle (ORCL), Procter & Gamble (PG) and Medtronic (MDT). Whether you buy some of these two funds’ top holdings or one of the funds, don’t let this opportunity to buy world-class companies at bargain prices pass you by. Steven T. Goldberg (bio) is an investment adviser.