A growing number of Wall Street pros are putting together “shopping lists” of stocks to consider buying after the market’s worst dive in two years put shares on sale.
With the Dow last week suffering its first 10% drop, or correction, in two years, and many individual stocks falling even more from the late-January market peak, some market strategists see opportunity to snap up shares of companies in all industries, including big names like Netflix, Kohl’s, UPS, Caterpillar and Verizon Communications.
“Many investors have been waiting to buy on (market) dips, and now the opportunity has finally come,” says Erik Davidson, chief investment officer at Wells Fargo Private Bank in Chicago.
Cheaper stock, stronger outlook
Jonathan Golub, chief U.S. equity strategist at Credit Suisse, believes the recent sell-off marks a brief period of disorderly trading that has led to a temporary mispricing of stocks, but does not reflect any real change to the positive economic outlook.
The sell-off and dramatic price swings after more than a year of market calm have been driven by concerns that the long period of low interest rates and tame inflation powering stocks to record highs may be coming to end. Investors fear an improving economy will force the Federal Reserve to raise interest rates more than forecast to cool off an overheated economy.
Golub, in a report titled “Let’s Go Shopping” released last week when the market entered correction territory, noted that while most stocks are down since the recent pullback, many companies’ business prospects have actually improved thanks to an improving economy and a better profit outlook due to lower tax bills under the new tax law. As a result, he says investors should consider buying “selectively.”
“If you wait until things have calmed down, the opportunity is gone,” Golub told USA TODAY.
Some well-known stocks with still-bright outlooks that made his list include consumer-focused names like video streaming service Netflix and department store chain Kohls. Other names include oil production and exploration firm Noble Energy, health insurer UnitedHealth, mutual fund firm T. Rowe Price, telecom giant Verizon Communications and computer chip maker Advanced Micro Devices.
Other names on the list include: CF Industries, a maker of agriculture fertilizers; W.W. Grainger, an industrial supply company that makes batteries, electric generators and plumbing supplies; and Coty, a cosmetic and beauty products maker.
Buy hardest hit parts of market
Another buying strategy is to focus on parts of the market that have plunged the most in the downturn, says Sam Stovall, chief investment strategist at CFRA, a New York-based firm.
His “battered bargains” strategy shows that since 1990 buying the three sectors that fell the most and holding them for six months after the end of the correction has resulted in a 24% gain, vs. a 22% rebound for the broad market. In the recent selloff, energy (-14%), health care (-11.7%) and materials (-10.6%) declined the most. Each can be purchased via sector-specific ETFs and mutual funds.
Stovall’s strategy also advises buying the 12 S&P 500 sub-industry groups that suffered the biggest declines from the Jan. 26 peak to the Feb. 8 low. Examples include package-delivery company UPS from the “Air Freight and Logistics” group; heavy-equipment maker Caterpillar from “Construction Materials;” and oil giant ExxonMobil from the “Integrated Oil & Gas” group.
Investors who want to take advantage of the recent volatility, however, should keep in mind that any stocks they buy now could still come under pressure in the short-run, says JJ Kinahan, chief market strategist at online brokerage TD Ameritrade.
“Putting together a shopping list is great, but it makes most sense for investors with a longer time frame,” says Kinahan.
The reason: Investors looking for a quick bounce could expose themselves to continued bouts of volatility in the short-term, which could cause shares to fall below their purchase price, he says. Longer-term, the chances of profiting on shares bought at current depressed prices are higher.
Periods of high volatility don’t normally end quickly, as they are caused by an event or a confluence of factors that will continue to hang over markets, says Kinahan.
Still, the potential for more volatile trading days ahead isn’t stopping Thorne Perkin, president of New York-based wealth management firm Papamarkou Wellner Asset Management, from telling clients to stay the course and consider adding more shares of quality companies that are well off their highs.
Large, core positions in client portfolios that he thinks will move higher include blue-chip stocks Apple, Boeing, Google, MasterCard, Facebook, Visa, J.P. Morgan, Citigroup and Amazon.
“This market may dip further before it settles down, but growth and corporate earnings are strong and will eventually push this market higher,” Perkin told USA TODAY. “Now is not the time to sell or change one’s long-term plan.”
The time to target bargains in the market is when they are available, as they are now, says Jamie Cox, managing partner of Harris Financial Group in Richmond, Va.
“The market drop is a gift for buyers,” Cox says.
