Lots of investors are hiding out, choosing to sidestep the stock market. Can you blame them? The backdrop is scary and it could get a lot scarier. The economy has probably slipped into recession. The dollar could plunge to depths that are hard to imagine. The credit market crunch could morph overnight from a crisis into a catastrophe.

Considering this scenario, what is the smartest course of action? Should investors take cover and hide? In a word, no. A rare opportunity to score huge gains in the stock market exists right now. Scores of high-quality companies have been discarded by panicky investors at fire-sale prices. The gap between price and value has widened to extraordinary levels.

When the gap will close is anybody’s guess. That the gap will close is a certainty. If you are an observer of cycles, you know that difficult markets never last. In due course, the sun will shine and optimism will reign again on Wall Street. There is but one mandate facing the enterprising investor when negativity is abundant; that is, to get in front. If you wait for the backdrop to improve before getting positioned, it will be too late. Prices will have already adjusted upward, well in advance of the fundamentals.

Here are some stock ideas to consider. There is a cloud of pessimism surrounding each company. Because of the hefty discounts applied to these names (which I own and continue to buy) investors should expect gains of 50-100 per cent over the next couple of years.

● Circuit City . This stock is so cheap at the current quote (less than $5 a share) that buyers have a good chance of at least quadrupling their money. The stock was at $20 a year ago when a slew of self-inflicted operating problems led to a string of poor quarterly reports. Circuit City has a number of levers it can pull to unlock value, such as a growing high-margin consulting business (Fire Dog), a strong internet presence and plenty of liquidity.

● Home Depot. Is there any investor alive who doesn’t already know that this retailer is sensitive to the housing cycle? When the entire investment community is fearful of the same thing, you can bet that fear is fully discounted. The market has overreacted, as it usually does, by pricing Home Depot stock at an extraordinarily cheap multiple of 50 per cent of sales. Home Depot investors do not need housing to rebound to robust levels in order to reap handsome profits. The stage is already set for a return of optimism. As easy quarterly comparisons cycle through, investors will soon realise that the worst news is behind this company, not ahead.

● Tecumseh Products . If you like no-brainer stocks, you will like this idea. The dramatic changes necessary to fix Tecumseh are done. Sell both the engine and electrical businesses – done. Pay off all domestic debt – done. Sell other miscellaneous assets not necessary to the business, recover monies from an over-funded pension and request a large tax refund. Done, done, done. Get out your spreadsheet and adjust for the dramatic change at Tecumseh and what you have left is something quite impressive. You have a world leader in compressors that generates healthy normalised margins on more than $1.1bn in sales. The balance sheet will have zero debt and well over $100m in cash in the next few months after monies from the tax refund, pension conversion and other items are received. The market is not paying attention here because the company is valued at only $440m. Big mistake. Check back in a couple of years. It will be at least double that number.

● Overstock. The current stock quote does not come close to pricing this company correctly. Critics of Overstock used to harp on about its balance sheet. Not any more. Cash is piling up fast. The company will end the year with $110m in cash after all bills are paid. That is a nice cash cushion for a growing online retailer that the market says is only worth $375m, or less than 40 per cent of sales. Look for a variety of growth initiatives in 2008 to re-ignite growth, such as the launch of Overstock Europe and Overstock Canada.

● Citigroup . The future for this conglomeration of market-leading global businesses looks exceptionally bright. Nearly everybody is critical of Citigroup right now. To be sure, past mistakes merit criticism. But the issue for investors is not what the company has done over the past couple of years. The issue is what Citigroup will look like two years from now. Over that time frame, investors can expect to generate a 50-100 per cent return.

The writer is a portfolio manager for Alsin Capital and the Turnaround Fund arne@alsincapital.com