A year ago, when the financial markets were mired near the lowest depths of their recessionary nadir, one value-oriented fund manager surveyed the scene and declared there was value sitting on the sidewalk just waiting to be picked up. Presumably, that fund manager got a sore back from repeatedly bending over the sidewalk to scoop up values that, most likely, reaped fat returns during the markets' meteoric rise since early March.

Which begs the question about how many bargains remain after the markets' V-shaped rebound. Depends on whom you ask.

"We've gone up too far and too fast, absent strong fundamentals to support that run-up," says Kevin Mahn, chief investment officer at Hennion & Walsh, an asset management firm in Parsippany, N.J. "The average P/E on large-cap U.S. stocks was around 11 times in early March. Now it's about 18 [as of early December], and the historic average is around 17. At what point in time do we start noticing that a 10% unemployment rate will affect consumer spending and impact economic recovery? If you're wondering if you missed the recovery, you might've if you're just a large-cap investor."

And now, the other point of view: "Even with the markets' strong run since March, we believe you can still find good long-term buys in the market," says Kent Croft, portfolio manager of the Croft Value fund. "As bottom up value investors, we continue to see opportunities in all capitalizations. With consensus earnings expectation for 2010 around $70 to $75 for the S&P 500, we do not think the overall market is overvalued and, if EPS numbers come in stronger, could even be undervalued on an earnings basis."

Either way, the once-in-a-decade fire sale of last February and March is over. "The Armageddon trade is off the table," says Mitch Rubin, chief investment officer and managing partner at RiverPark Advisors, a portfolio manager that's subadvisor to actively managed exchange-traded funds (ETFs). "There are crisis moments when if you have the liquidity and patience with your capital you can find things that are really just thrown out. But now we're in regular mode, or whatever exists after a crisis. In non-crisis mode, you're back to looking for value because you think something is misperceived. But there's always good value in any market."

What Is Value, Anyway?
"The problem is that most rely on the S&P 500 price-to-earnings multiple as the only value metric," says Scott Thompson, president of Thompson Wealth Advisors in Statesville, N.C., an independent registered investment advisor affiliated with Geneos Wealth Management. His strategy is to first find the undervalued sectors, then find undervalued companies in that sector. He looks for strong cash flow, low debt levels and a high net tangible asset number to determine true value.

"What several don't realize is that assets are valued at cost on the balance sheet less depreciation," says Thompson, who researches and picks securities for his client portfolios. "If you have appreciated assets on the balance sheet, there could be a tremendous amount of value. I have seen situations where the assets were actually worth more than what the company was trading for."

Among the sectors on Thompson's watch list at the end of the year were natural gas and insurance, two areas that he believes will rise as the economy gains steam.

"Insurance has been a very 'soft' market, and will eventually be a 'hard' market, which means they don't have to negotiate prices," Thompson says. "They're trying to move that way, and when they do the profits should dramatically improve. But insurance companies still have some problems with some assets on the balance sheet, so you have to know what's going on there by digging into the balance sheets."

To George Feiger, CEO of Contango Capital Advisors in San Francisco, value depends not just on the characteristics of an asset, but also on the attitude of the holder. "A 'value' you're not going to have the patience to realize is not a value," he says.

And Feiger sees that as an increasing problem in a world of momentum trading with tons of money chasing assets around the globe. "Even if you have a good idea of value, the patience of clients is much more limited," he says, adding he's reluctant to put some clients into illiquid investments with good long-term upside potential because he knows they won't have the discipline to see it through.

Nor do clients always see value when it's staring them in the face. A year ago, Feiger saw screaming value in the commercial paper of AAA- and AA-rated blue-chip corporates that yielded around 4% to 5%, but some of his clients wouldn't go for it. "Now they want to get back into the market after they've rebounded," he says. "But we say at today's spreads it's not such a good idea anymore."

Feiger currently sees value in certain areas such as short-duration, high-credit-quality fixed income. "There's value there not because it'll go up a lot, but because it won't go away," he says. He also sees value in the secondary market for private-equity participations.

"If you're a qualified purchaser or accredited investor, there is a lot of stuff being sold because people can't make the capital calls or don't want to make them," Feiger says. "You can get real value because you can get diversified positions in private-equity investments where the bad stuff was written off during the crisis. They're getting something real and they can get it at very attractive prices."

Value Imposed From Above
Saturna Capital, the investment advisor to both the Sextant and Amana fund families, uses a value screening approach mandated by Amana, which invests based on Islamic principles, or Sh ariah.

In the purest sense, Shariah calls for avoiding businesses that deal with interest. "That's impossible to do," says Nicholas Kaiser, Saturna's chairman and equity portfolio manager. "So the agreed screening process in most Islamic markets is to limit debt to market cap, which means we shouldn't buy a stock with more than one-third debt-to-market cap. That helped us in the '08 market, but hasn't helped us much in the '09 market."

Kaiser believes it's still a value market in certain sectors such as energy, health care and some telecom areas, along with consumer staples. On the flip side, he says financials, materials and certain commodities have zoomed too quickly and are probably overvalued.

Recent big stakes in the large-cap value-oriented Amana Income fund included Proctor & Gamble, Colgate-Palmolive, Exxon Mobil, 3M and EnCana, a big player in the Canadian oil sands region.

One company Kaiser likes is Gentex Corp., a manufacturer that derives a big chunk of business by selling headlight and mirror dimmers to the automotive industry. The stock recently traded at roughly 26 times forward earnings, but Kaiser says that doesn't reflect the company's value proposition.

"It's an example of something we look for," he says. "It's not heavily leveraged, it has reasonable growth, and it's been getting new contracts, including from Lexus, even during the recession."

Kaiser still sees value--and growth--in overseas markets such as Brazil and Turkey, but not in Europe. "Europe has value but is heavily taxed, and we're not juiced about its growth prospects," he says.

Multifaceted Value
"We always thought the growth versus value argument was a bit off-because what growth guy doesn't want to buy things at value, and what value guy doesn't want to have growth," says Mitch Rubin from RiverPark Advisors. "We tend to look at both. We're growth with a value perspective, or value-oriented growth guys. We look at the future cash flows versus the current enterprise value of company."

Rubin says one of his firm's key metrics is how much extra cash a company can generate relative to today's market cap. "It's good if it's more than 25% and it's excellent if it's more than 35%," he says.

As of early December, the top two holdings in Rubin's RP Growth ETF were discount retailer Dollar Tree and MasterCard. Rubin describes the former as a big cash generator with no debt and low overhead because it doesn't own its stores. Based on his five-year earnings growth projection, Rubin expects Dollar Tree to generate more than 50% of its current market enterprise value in excess cash.

"If the market shrinks by 50%, I'll be flat because you figure to get dollar-for-dollar on the cash generated," Rubin says. "If the market stays the same, I'll double my money, and if the multiple increases I could more than double my money."

Dollar Tree shares recently traded about 12 times forward earnings, but Rubin says the same principle applies to MasterCard, a growth stock that recently traded at a reasonable 18 times forward earnings. "Even though it's been a relatively high p/e stock that's had a good run, we think it'll generate more than half its market cap in excess cash during the next five years," he says. "We see it as a value stock because 50% is as good as it gets when it comes to the excess cash metric."

RiverPark also looks at the replacement cost of assets underlying a company. One example is cruise operator Carnival Corp., which recently traded at 14 times forward earnings. Rubin says the company's value comes from calculating the replacement costs of the 170,000 berths it owns, which he says is roughly $250,000 per berth.

But with a recent enterprise value of $35 billion divided by the number of berths, Rubin says the company traded at about $200,000 per berth. "That means I'm buying it at a discount to the replacement cost of the fleet," Rubin says."

Hazy Underpinnings
Milton Ezrati, senior economic and market strategist at Lord Abbett, says history shows that when earnings trough at the end of recessions and stocks rise in anticipation of a recovery, backward-looking P/E multiples rise to dizzying heights. But as earnings inevitably strengthen during the recovery, markets can keep rising even as multiples fall during the recovery stage.

Ezrati cites numerous examples of this happening, from the tech wreck of 2000-2002 all the way back to the Great Depression. His conclusion: Current circumstances--and multiples-point toward a buy signal, and the earnings recovery should bring down multiples even as stock prices continue to rise.

But rising stock prices will be predicated on rising earnings, which during this year's second and third quarters largely came more from cost cutting rather than from sales gains. As of December 8, the S&P 500 traded at 27.6 times trailing earnings and 14.5 times 2010 earnings, which compares to the typical trading multiple of 18 times forward earnings.

Sounds cheap, but maybe not as cheap as you think. Howard Silverblatt, Standard & Poor's senior index analyst, says earnings on the S&P 500 are forecast to jump 35% next year. "After all of the cost cutting, the idea is that if sales increase, they'll sink to the bottom line much quicker and that earnings will rise at a better rate," he says.

But Silverblatt cautions that if earnings assumptions don't pan out, investors who are nervous about the S&P's roughly 60% gains since March 9 (as of early December) might shift into the sell mode. "We're paying a lot [on 2010 earnings] based on the belief we're going to have growth," he says.