Application of Stock Picking Basics (2)

It is very easy to get carried away and buy stocks when the market is up to ride the positive upward momentum. But it is much more difficult to invest in declining markets. Declining markets provide opportunities to buy stocks that are oversold or undervalued. Investors need to realize the following points when investing in declining markets:

a) Make sure you have the cash available to invest in new options. This is why it is always a good idea to keep a share of your stock portfolio liquid on the sideline for major drops in stock prices.

b) Selling a stock at a loss may be necessary to get into another investment opportunity with more potential. If you think the stock you currently own can only go back up 20%, but another company has the potential for 30% gain, write down the loss for the year and make a better investment choice.

c) Keep your head up and don’t get discouraged by all the negative news because people will panic and it’s your job to find stocks that don’t deserve to be at their current valuations. Think of down markets as discounts the market is offering you.

d) Don’t just buy whatever has dropped the most, but still concentrate on what businesses have the best future growth prospects. Remember, some sectors are not very attractive markets to buy whether you’re in a bull or bear market. Right now, I feel that way about home builders and mortgage companies. Maybe a company like Home Depot (HD) would be a safer bet if you want a company that has some direct correlation with the housing market.

e) Mentioned in the Application of Stock Picking Basics (1), make sure you only invest in companies that you understand. If you don’t understand how the company makes money and will be able to increase profits domestically and globally, it doesn’t matter how much they are down.

The NYSE was down 2.6% (more than 360 points) and will probably feel some negative effects tomorrow with much uncertainty in the market. Stocks from all sectors got pummeled, and some stocks of note to take a look at that were down at least 4% are:

  1. Las Vegas Sands (LVS): -5.6% in regular session and -15.1% after hours to 106.402
  2. Peabody Energy (BTU): -11.3% to 49.47
  3. Wynn Resorts (WYNN): -4.0% in regular session and -8.3% after hours to 142.084
  4. Aluminum Corp of China (ACH): -7.1% to 68.02
  5. KB Homes (KBH): -6.4% to 25.88
  6. Merrill Lynch (MER): -5.8% to 62.19
  7. Flotek Industries (FTK): -28.3% to 36.45
  8. Aéropostale (ARO): -7.2% to 21.26
  9. Nucor Corporation (NUE): -6.6% to 57.91

There are so many stocks down over 4% today that it’s hard to pick and choose the “best” ones, but there are a lot of opportunities for investors who have the right mind set while others start to panic. Invest wisely!!

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3 Responses to Application of Stock Picking Basics (2)

  1. tao2death says:

    Don’t forget about Crocs (CROX) and WellCare Health Plans (WCG), they’ve also dropped significantly. ACH is a played out stock, though. It was a good buy below $40, but right now it’s got a PE almost twice the industry average and its projected earnings are going to be flat over the next few years. Not so good fundamentals.

  2. bumscientist says:

    I would also stay away from builders and Merrill Lynch. Merrill’s loses indicate that something more than the CEO needs correcting. A new CEO might not do the trick. Goldman Sachs was able to hedge the mortgage crisis by shorting.

  3. haystackfarmer says:

    I was watching a Jim Cramer segment on TV and he mentioned that it is too difficult to invest during earning announcements. He recommended evaluating companies after they’ve released earnings and investors have historically made more money between quarterly earnings. Builders will make some investors a lot of money as the housing sector will not be terrible forever, but it’s all about timing on when to get in.

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