Back in October 2007, when the Dow was sitting at record highs above 14,000, there weren’t too many bargains out there. A furious multi-year advance was winding down, and valuations had become overly stretched.

Most stocks at the time were trading well above fair value, so all it took was a discount of around -25% to catch my eye — and anything cheaper than that deserved serious consideration. But even then, those opportunities were few and far between.

Obviously, that dearth of choices made life difficult for value investors.

Today, we have the exact opposite problem — there are literally hundreds of quality companies trading at wide discounts of -50% or even more. Don’t get me wrong, this is a pretty good problem to have, but it can be vexing nonetheless. After all, no matter how wide the field of potential candidates, some stocks will undoubtedly have stronger pedigrees than others.

Not surprisingly, a number of top value investors have already made up their mind. So let’s see where the best and brightest are putting their money to work in this one-of-a-kind market.

Investing with the Stars
There is no definitive “A-list” roster of superstar value investors. But if there were, you’d undoubtedly see names such as Warren Buffett, Bruce Berkowitz, Bill Nygren, Charlie Dreifus, and Mario Gabelli.

Others like Marty Whitman, John Neff, Jean Marie Eveillard, Whitney Tilson, Wally Weitz, Bill Miller, David Dreman, and Joel Greenblatt also deserve top recognition (unfortunately, we only have so much space available).

Golf has Tiger Woods, novelists have Tom Clancy, and the investment community has these celebrities — they are at the pinnacle of their craft. And not surprisingly, these money managers have all amassed prodigious gains over the years for their shareholders.

Over the past few months, these gurus have come out with ringing endorsements for certain stocks. This isn’t empty talk — they are putting their money where their mouth is. Thanks to regulatory filings, interviews and shareholder reports, we can look over their shoulders and see where these elite investors are currently finding the most promising opportunities.

Of course, any list must begin with Warren Buffett. But in case you haven’t noticed, we have recently launched a new “Buffett Tracker” feature on our website to keep readers apprised of his every move. Therefore, we will skip ahead and start with a close protege.

Bruce Berkowitz: Berkowitz is the lead manager of the Fairholme Fund, which has delivered a cumulative gain of +150% since inception 9 years ago. By comparison, the S&P 500 has backtracked -28% over the same time frame.

When asked recently to name the one key metric that he uses to evaluate investments, Berkowitz didn’t hesitate to say “it’s all about the amount of cash a company generates that can be passed to owners in relationship to the price.” Sound familiar?

Lately, he has plowed more than 50% of his fund’s assets into health-care (particularly big pharma), aerospace and defense. His rationale is that there is ultimately nothing more important than the health and well-being of our families, and defense and health-care spending eat up a large percentage of the federal budget.

His largest portfolio holding is Pfizer (NYSE: PFE), and recent buys include Boeing (NYSE: BA), General Dynamics (NYSE: GD), and Northrop Grumman (NYSE: NOC).

Bill Nygren: Bill Nygren is lead portfolio manager of the Oakmark Fund, which has racked up double-digit annualized gains for the past 18 years. Consistent with our approach here at Half-Priced Stocks, Nygren is confident that, over time, undervalued stock prices will always rise to reflect the value of the underlying company.

In general, he prizes excess cash flows and relies on discounted cash flow (DCF) modeling for valuation — buying stocks trading below 60% of fair value and then selling once they reach 90%. Nygren runs highly concentrated portfolios, so only his best ideas make the cut.

Several stocks have passed his meticulous screening process lately, including Illinois Tool Works (NYSE: ITW), Texas Instruments (NYSE: TI) and advertising giant Omnicom (NYSE: OMC). But perhaps most noteworthy is a new stake in Microsoft (Nasdaq: MSFT).

Nygren explains that Microsoft has always been an excellent company, but this is the first time that it has slipped into value territory. Back in 1999, the firm churned out profits of $0.70 per share and the stock peaked above $60. Today, it earns more than twice that much and there are fewer shares outstanding, yet they trade at less than one-third the price. In addition, Microsoft has over $20 billion in cash and offers a yield above the 10-year Treasury.

Charlie Dreifus: There’s a good reason why Charlie Dreifus was just selected Morningstar’s “Domestic Stock Fund Manager of the Year.” He captured that prestigious award by losing less than -20% in a year when many other small-cap stock funds lost more than -40%.

During the last bear market from 2000-2002, his shareholders enjoyed a +53% gain, while the Russell 2000 sank -41%. What would you expect from an investor who refers to margin of safety as “the central concept in investing.”

Dreifus avoids flashy “growth-story” stocks and sticks to boring companies with unassailable balance sheets and lofty returns on capital — not unlike Warren Buffet. He has learned to be highly skeptical of reported earnings (which can be easily manipulated) and favors companies with transparent accounting practices and plenty of working capital.

In fact, Dreifus is drawn to the same type of cash-rich, “net-net” companies that we went in search of last month, those trading for less than liquidation value. And he fishes in the micro/small-cap waters, where such bargains are more plentiful.

Lately, Dreifus has been focusing his efforts on consumer-oriented stocks like children’s apparel retailer Gymboree (Nasdaq: GYMB). He is also overweighting the industrial products sector, whose prices “have embedded in them all the nastiness the economy is likely to deliver.”

Regardless of the industry, he stresses that in the current environment it pays to look for companies with ample liquidity, little leverage and reliable dividend payments.

Mario Gabelli: Mario Gabelli is yet another Buffett disciple whose value roots can be traced back to Ben Graham. He employs many of the same research-driven tactics — from dissecting a company’s filings to interviewing its managers.

Gabelli has developed a proprietary methodology that evaluates the real-world value of a company’s balance sheet assets and future cash flow stream to determine its “Private Market Value” (PMV). Like a private equity group eying a potential takeover target, he looks for companies trading well below PMV. From there, he identifies those with favorable catalysts (spin-offs, regulatory shifts, industry consolidation, etc.) that will propel the shares forward.

Since the inception of his flagship Gabelli Value Fund in 1989, this approach has quadrupled a $10,000 investment into more than $45,000 today (or roughly $80,000 before this selloff.) Thanks to a recent Barron’s Roundtable discussion, we know exactly what his sights are set on now.

Gabelli points out that there are 240 million cars on the road, many of which have been in service longer than six years (the point that repairs and maintenance become inevitable). Because consumers are holding off on new vehicle purchases right now, auto parts distributors like O’Reilly Automotive (Nasdaq: ORLY) are looking interesting.

Elsewhere, he likes Dr. Pepper Snapple Group (NYSE: DPS), which churns out frothy cash flows and could be a buyout candidate. Maine & Maritimes (NYSE: MAM) is another favorite. The electricity transmission/distribution company stands to benefit from investments in green power, and a new line carrying wind-generated electricity to the New England power grid will put a charge in earnings.

Survey Says…
Unfortunately, we’re running out of space here today, and I haven’t even had a chance to talk about legends like John Neff, who turned in a +5,600% gain during his tenure as manager of the Vanguard Windsor Fund (note: he’s buying hard-drive maker Seagate Technology (Nasdaq: STX)).

But I’m sure we’ll be checking in on these guys from time to time.