Did you miss the bear market bottom? If you snapped up stocks in March, with the S&P 500 Index ($INX) near 675, you're probably feeling pretty perky.
If not, you may have another chance. The rally stalled in mid-June, and a lot of experts are predicting a sizable pullback. Many stocks have already lost ground.
That leaves us to face vexing questions: Is a stock's drop a great buying opportunity or a sign of trouble ahead? Is the market regrouping, or is the real bottom still ahead?
How do you know the difference, anyway?
I posed these questions to several seasoned money managers with decades of market experience. The initial reaction was always the same: a knowing laugh that said, "That's the trickiest thing about investing. And if you find the answer, let me know."
"No one ever rings a bell at the bottom," says Insight newsletter writer Gary Shilling, who bought his first stock in 1961.
Still, these money managers helped me put together basic guidelines that point to about two dozen stocks as potential buys right now. In this group, I like these 10 the most: Berkshire Hathaway (BRK.B, news, msgs), Applied Materials (AMAT, news, msgs), KLA-Tencor (KLAC, news, msgs), Genzyme (GENZ, news, msgs), McMoRan Exploration (MMR, news, msgs), ConocoPhillips (COP, news, msgs), ViroPharma (VPHM, news, msgs), Gap (GPS, news, msgs), Walgreen (WAG, news, msgs) and BHP Billiton (BHP, news, msgs).
More from MSN Money
Question No. 1: Did anything change?
Whenever a stock has sold off, your basic challenge is to figure out whether anything has changed that permanently impairs the company's profit potential. Is the business fundamentally different?Your first stop is the news flow. You need to understand whether news developments have affected a company's competitive advantage, says Pat Dorsey, the director of stock analysis at Morningstar. "If a company can't raise prices anymore, but it could in the past, that's a big deal."
One shortcut here is to avoid one-trick companies with a hot product that could flame out. Stick with tried-and-true businesses that continue to profit from competitive advantages, such as solid brand names or mastery of their niches.
Morningstar calls these wide-moat companies. Their competitive advantages won't vanish quickly. So you can feel comfortable buying during pullbacks as long as you're an investor with a long-term horizon -- at least a couple of years.
Here's a list of 20 wide-moat stocks that sold off more than the markets in June and look cheap now:
| Name | June price decline* | Recent stock price* | Buy below this price** | Market cap* | Morningstar rating*** |
|---|---|---|---|---|---|
12.7% | $23.63 | $35.00 | $3.3 billion | 5 | |
12.4% | $23.64 | $31.50 | $4.0 billion | 5 | |
10.0% | $34.21 | $34.30 | $1.8 billion | 5 | |
9.6% | $15.94 | $19.60 | $11.2 billion | 5 | |
9.2% | $18.07 | $19.60 | $511 million | 5 | |
8.0% | $32.16 | $35.20 | $2.2 billion | 5 | |
7.7% | $47.20 | $49.00 | $47.0 billion | 5 | |
7.7% | $25.11 | $32.20 | $52.9 billion | 5 | |
7.5% | $54.70 | $62.30 | $14.8 billion | 5 | |
7.1% | $2,761.50 | $3,220.00 | $128.7 billion | 5 | |
6.9% | $33.00 | $35.70 | $19.9 billion | 5 | |
6.9% | $35.07 | $35.70 | $17.6 billion | 5 | |
6.9% | $27.77 | $29.40 | $2.9 billion | 5 | |
6.5% | $21.86 | $26.60 | $4.9 billion | 5 | |
5.9% | $23.39 | $27.00 | $27.3 billion | 5 | |
5.8% | $10.61 | $15.40 | $14.1 billion | 5 | |
5.6% | $42.07 | $54.60 | $9.0 billion | 5 | |
5.5% | $22.88 | $27.20 | $42.5 billion | 5 | |
5.1% | $22.11 | $24.50 | $3.4 billion | 5 | |
5.0% | $22.76 | $24.50 | $13.4 billion | 5 | |
S&P 500 Index ($INX) | 2.5% |
*As of June 23 / **Morningstar recommendation / ***On a scale of 1 to 5, with 5 the best
If you don't want to mess with individual stocks, Morningstar has an investment vehicle that rebalances the cheapest of its wide-moat companies every quarter, called Elements Morningstar Wide Moat Focus (WMW, news, msgs), an exchange-traded note. It's outperforming the market this year by about 17 percentage points.
When sizing up a sell-off, be careful of two traps. First, even with no news reports, there could be a company development that hasn't yet been made public. Check the trading volume. If one day's volume is a lot higher than the average for the past month, look out. Some people probably know something you don't.
Also, never be lulled by company comments that it "knows of no reason" for a sell-off. "That is not very reassuring," says Hugh Johnson of Johnson Illington Advisors. "They may not know of a reason. But other people may."
Video on MSN Money
Small companies, big dividendsSmall-cap stocks represent an opportunity for income-hungry investors. Barron's Johanna Bennett reports.
Question No. 2: Are insiders buying on the drop?
This is usually a good sign that it's safe for you to buy as well. You can check by using the insider trading page at MSN Money; just punch in a stock symbol.Here's a great example from earlier this month: Energy company McMoRan Exploration sold off in mid-June when it issued stock to raise capital. On the pullback, co-Chairman James Moffett purchased more than $5 million worth of shares, and the other co-chair, Richard Adkerson, bought $500,000 worth. Each paid $5.75 a share (the stock closed Tuesday at $5.96).
McMoRan has been reporting big losses. But the insiders say it also has big potential. "We have multiple high potential deep gas and ultradeep targets," Moffett said in April. And he and Adkerson are backing those words up with money.
Just remember that insiders are typically early. So when you follow them into a stock, be sure to have a time horizon of at least a year or two.
Continued: Watch what smart investors are doing
Rate this Article
High
