Young Bargain Hunters Grin at Stock Slip : Investing: Falling prices give investors the chance to buy in at better prices. Smart investors buy when others sell.
The younger you are, the happier you should be when stock prices plunge, money managers like to say.
Those falling prices give young investors--anybody with money they can tie up for five years or more--the chance to buy in at better prices. A stock that was universally loved last week at $35 a share ought to be even more popular this week at $27.
That’s a lesson many investors seem to have learned. By the beginning of this week, institutional investors and a few hardy individuals were striding toward the market with their shopping baskets in hand, looking for bargains left on the floor amid all the ripped up “sell” orders executed in the week before Easter.
“We like corrections,” says Denis Leplaige, director of equity investing for New York money managers MacKay-Shields Financial Corp.
“It’s like getting a free bonus. We get a chance to look for new ideas or pick up some old ideas at valuations we couldn’t get even a week ago.”
Smart investors buy when most investors are selling, but it is a little more complicated than that. Some stocks are forced down by the sinking-tide-lowers-all-boats effect, but others are drawn down for valid reasons and might take longer to bounce back.
If we’re not in the big bad bear, we aren’t exactly in the any-fool-can-make-money bull either, and it’s the judicious stock picker who will benefit from recent events.
“People really have to be selective when it comes to choosing whatever stocks they want to add to their portfolio,” cautions Sam Stovall, editor of Standard & Poor’s Industry Reports and an expert in sector trends.
What kind of selectivity works in today’s shaky stock market? The same kind that works at the shopping malls--go for durable, quality merchandise that’s on sale and in season.
Leplaige, for example, cautions investors to consider where we are in the business cycle.
Many economists believe the United States is moving into the expansion phase of the business cycle. That’s good for steel, oil and apparel and not so good for interest-sensitive industries like banking, home building and utilities. So, while there are good buys on the Street now for steel companies and banks, for example, it would take a more patient investor to make money off the banks than the steel companies, says Leplaige.
Investors should consider which sectors have taken the greatest hits, says Stovall. Manufactured housing was the biggest loser in the seven days that ended March 31, falling 15.7%, he points out. Not too far behind were stocks in these sectors--hotel/motel (gaming); communications equipment; miscellaneous metals (not including gold); home building, computer software and services; personal loan companies; automobiles, aluminum and brokerage firms. All are likely prospects for bargain hunters.
Some companies that proved resilient most recently had been beaten down before March went out like a bear. Those include utilities, among the most interest rate-sensitive of sectors, and investors already had discounted the impact of significant rate hikes on utility stocks. Drugs and other health-care stocks, too, had been beaten down for some time.
“I think some good quality utilities have been oversold, and I think biotech medical stocks have been oversold,” says Richard Maturi, author of “The 11 Best Tactics For Beating the Market.”
To find stock market bargains, don’t just look at this week’s price compared to last week’s. Use traditional measures of value--compare a stock’s price to its earnings and to its cash flow, advises Leplaige, and buy companies in which these ratios are below their average levels.
Finally, most experts caution that even bargain hunters should not spend all their money. There’s always something new coming on sale, and there’s more from where the most recent “correction” came from. “I don’t think we’re done yet,” says Maturi.
