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Use Fear to Your Favor, Buy Quality Stocks

Friday, 18 Mar 2011 08:45 AM

During the last three months or so, the equity markets have been under attack by a nonstop series of negative events that the fear mongers used to predict another global market crash.

In the media, I have constantly listened or read the words: panic, crash, sell-off, risk, collapse, inflation, deflation, default, risk-free assets, etc.

It is true that the market has been through a lot with events such as:

• Ireland's default woes;

• Portugal's default woes;

• Spain's default woes and credit downgrades;

• Political revolution in Egypt;

• Civil War in Libya;

• Protests and unrest in Middle East oil-producing countries;

• A massive earthquake in Japan and the risk of nuclear disaster.

With all this turmoil, plus a fear-hyping media, you would have expected that the markets would suffer a major sell-off.

Well, the S&P 500 during this time period has made new highs after new highs until the last three weeks or so. Since then, it has only fallen about 5 percent in what is a totally normal correction after a huge rally.

Emerging markets have fallen some more, which is also normal after outperforming the S&P 500 for over two years.

My recommendation is to don’t fall prey to the fear and use these sell-offs as opportunities to buy quality stocks that are undervalued.

When the market sells, it tends to drag down all type of stocks with it.

Buy companies that will keep being very profitable and have consistent and growing earnings in good and bad economic conditions. These are companies with solid economic moats that fend off competition and allow them to maintain high profit margins and returns over invested capital.

You would think that these stocks are trading at huge premiums and high valuations. Wouldn’t you like to own a business that makes you money every year independent of the economic conditions? You would probably pay more for this type of business than one that has volatile earnings and depends on the economic cycle.

Well the funny thing is that right now Mr. Market is pricing these quality stocks at very low or single-digit P/E ratios while the more cyclical stocks are trading at high valuations.

Which stocks are fundamentally sound and offer good valuations? You should you do your own research but there are good-value candidates in such sectors as healthcare, retail and technology.

Meanwhile, also note what has been the reaction of the Japanese Central Bank to help stem Japan's financial markets: Print money like there is no tomorrow. Trillions in yen have flooded the market.

The aggressive monetary policies will continue in debt-laden countries like Japan and the United States and thus help push gold and precious metals higher. Gold stocks at the current levels also look very attractive.

Do your research, pick your best shots and buy fundamentally sound, quality stocks.

About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. Click Here to read more of his articles.
 

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VictorRiesco
During the last three months or so, the equity markets have been under attack by a nonstop series of negative events that the fear mongers used to predict another global market crash. In the media, I have constantly listened or read the words: panic, crash, sell-off, risk,...
victor,riesco,fear,favor,buy,stocks,us,economy
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2011-45-18
 

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