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This Absurdly Cheap Stock May Be a Sign of the Market’s Growing Inefficiency

The efficient market theory implies that Mr. Market is more efficient at pricing stocks. In these turbulent times, however, this theory goes out the window as the rise in popularity of passive investment instruments has made way for amplified amounts of volatility across the broader markets.

That means that for the average investor, green days will be greener and red days will be much harder to stomach. For those of us with a lower tolerance for risk, the elevated volatility may seem like an ominous sign, especially given that Jack Bogle, founder of Vanguard, recently stated that he’s “never seen a market this volatile to this extent in my career.”

These comments may be a cause for concern, but they definitely shouldn’t be treated as gospel. Sure, Bogle’s been around the game for decades, through several corrections, bear markets, and crashes. However, that doesn’t necessarily mean that a catastrophic implosion is in the cards over the next few years. He doesn’t know for sure — and neither do we. When the next crash inevitably happens, however, it could be a real doozy, but for now, such an event isn’t worth speculating on.

Instead, there’s money to be made for opportunistic investors who are able to embrace volatility as an opportunity to spot exacerbated declines in quality merchandise that Mr. Market has been pricing. If you’re a risk-averse investor, you can still profit profoundly from this new normal, where +2% movements are just another day for the markets.

This does not necessarily mean the risks of investing in the stock market have gone up, however. Although the risk-averse tend to dread volatility, Warren Buffett loves the wild swings that come with volatility, as it naturally produces more attractive entry points in some quality low-risk stocks that rarely have such a great margin of safety. In an environment where stocks take wild swings based on the broader sentiment, it can be easy to forget about the long-term fundamentals of a business.

Alimentation Couche-Tard Inc. (TSX:ATD.B) is one stock whose decline has been severely exacerbated by the recent rise in volatility. The company’s recent quarter was a disappointment, but given the promising longer-term growth story, does the stock really deserve to trade at the lowest multiple in recent memory?

The stock’s now in bear market territory, off ~22% from its all-time high on a quarter that was plagued with one-time issues and higher fuel margins, which are also a temporary headwind. Couche-Tard trades at just 17.62 times trailing earnings. Given the expectations of high double-digit EPS growth over the near future, I think shares are much lower than they deserve to be.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette owns shares of ALIMENTATION COUCHE-TARD INC. Alimentation Couche-Tard is a recommendation of Stock Advisor Canada.

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