5 stocks to buy as prices drop

By Jim Jubak

The stock market is fixated on the short term. We all know that. It's an unusual occasion when stock analysts and investors look more than a few quarters ahead. That means stock prices often tend to respond to short-term news as if it were the only news.

And that means investors with long-term views of companies and economic trends can often buy likely long-term winners while they are temporarily depressed by short-term news. This kind of long-term thinking in a short-term market is one of the best ways for the average investor to beat the stock market indexes.

In pursuing that kind of strategy, however, too much caution is actually a bad thing. Let me explain -- and give you some examples of stocks and sectors where taking the long view will pay off.

Don't fear the long term

The past week or so has been a vivid reminder of how hard it is for investors to take the long view.

Many of us are convinced that over the next decade or more the U.S. dollar will decline in value, commodity prices will climb, inflation will re-emerge, gold will continue to march higher and developing economies will outperform.

But all it took was a (so far) very modest correction -- a 5% drop in the Standard & Poor's 500 Index ($INX) from Oct. 19 through Oct. 28 -- to rout all those convictions.

Investors who believe, firmly, in those long-term trends sold gold, oil and other commodities, bought dollars and dumped developing economies. The iShares MSCI Brazil Index (EWZ, news, msgs) exchange-traded fund fell even more steeply than the S&P 500, dropping 6.2% in the same period.

That's completely understandable.

After all, investors have suffered through two vicious bear markets in the past 10 years. And the lesson of those bear markets is to sell first and ask questions later.

It also doesn't help that everyone is waiting for a correction that will take some of the exuberance out of the rally that began March 9. You just don't get 60% rallies without 10% corrections -- but that is exactly what this rally has delivered. Call it too good to be true.

Now, caution is a good thing. I don't believe the economic recovery is clearly sustainable yet (see my Oct. 29 post on JubakPicks.com on the third-quarter gross-domestic-product numbers for why not). It's certainly not the time to get reckless.

Don't be overly cautious either

But just as you can overdo fear at market bottoms and greed at market tops -- to the very real detriment of your portfolio -- you can also overdo caution.

And right now, caution shouldn't be stopping you from making the kind of long-term bets that you'll need if you want to earn decent returns in the decade ahead. If, as I suspect, average annual returns are going to be lower than the long-term average for stocks of about 10%, then you need some kind of strategy for beating the market if you hope to meet your financial goals.

Most of us aren't going to get where we want to go averaging 5% a year before inflation. And while saving more is great advice, it's awfully hard for many people who are struggling to rebuild household balance sheets and seeing paychecks stagnate (at best) as costs of things like insurance and energy rise.

If you have a long-term investment trend that's as clear-cut as the ones I've mentioned above, you ought to regularly fight through the temptation to be overly cautious and set up a strategy for buying low whenever you get a chance.

That's exactly what the best oil company CEOs are doing right now, for example.

Think natural gas

Oil companies have to take the long view. Any investment decision they make today -- Exxon Mobil's (XOM, news, msgs) decision to bid for oil and gas exploration rights off Ghana, for example -- isn't likely to pay off for years and years and years. That time frame for decisions makes them inherently cautious: They certainly don't want to make a decision with a payoff 10 years down the road on the basis of today's fleeting enthusiasm or pessimism about oil prices. But they also know that if a company doesn't take risks today, it won't be around tomorrow.

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And what are these cautious long-term risk takers investing in right now? Natural gas. They're taking advantage of the currently depressed prices for natural gas to buy into future sources of supply. In the long term, they believe, the price of natural gas will move up as a recovering global economy demands more energy. Natural gas, they also know, is a key transitional fuel for a world trying to reduce its output of carbon dioxide. It burns with less CO2 emissions than coal or oil, and it doesn't require an expensive retooling of the energy infrastructure, as wind and solar do, before it can become a major source of power.

Individual investors can make a similar long-term investment by buying shares of a low-cost U.S. natural-gas producer, such as Ultra Petroleum (UPL, news, msgs), whenever the energy sector goes into one of its periodic panicked sell-offs. The stock certainly has the volatility that makes this strategy work for a long-term investor. At a current price near $53 a share, Ultra sells for well below its June 2008 high of $98 but well above its 52-week low of just below $29. It traded near $45 as recently as August, and I'd certainly be interested in adding to positions when it next hits that price range.

Continued: The view across the pond

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