The Art of Buying Stocks During Volatile Markets

Dow 2011 2We’re in a new phase in the stock market this year: stocks are correcting, and your investment skills are being tested.

We had a year like this in 2011 (see chart on right).  The Dow Jones Industrial Average went up 5.5% that year, but the ride was nerve-wracking.  Traders did well.  Buy-and-hold investors probably jumped ship when the market fell in March, or June, or August-September-October, or at Thanksgiving.

The point is that successful stock market investors have strategies in place for deciding which stocks to buy, at what prices.  Let’s focus on buying low.

Given a volatile market, here are the two types of stocks I would buy:

1.  Buy high quality, undervalued stocks during small price corrections.

Most investors have more good stocks on their radars than they can own at any one point in time.  During market corrections, take some of your cash and buy one of those stocks which has fallen to its support level.  We’re not looking for stocks in a freefall; we’re just looking for stocks which have repeatedly bounced at the same price during recent months, then rebounded.

IVZ 04-08-14Invesco Ltd. (IVZ, $35.10) is a good example.  The company is projected to grow its earnings per share (EPS) 14-16% per year for the next three years; the price-earnings ratio (PE) is 14.4; and the dividend yield is 2.6%.

The stock has been trading with the market, bouncing at support around $34.25 five times since early December.

2.  Buy high quality, undervalued stocks during upside price breakouts.

SLB 04-08-14When you can find stocks which are seemingly unaffected by market downturns, those are likely to be the first to go up when the market rebounds.

The energy sector is loaded with these types of stocks right now.  Take Schlumberger Ltd. (SLB, $98.09) for example.  Wall Street expects EPS to grow 19% in each of the next two years.  The PE is 17.3 and the dividend yield is 1.6%

The stock recently broke past three-year resistance.  Nobody has missed their opportunity to own SLB shares and to be well-positioned for capital gains.  There could be no more perfect chart pattern!

KRFT 04-08-14Kraft Foods Group (KRFT, $57.27) also has a bullish chart pattern.  I wouldn’t recommend KRFT on my website, because this year’s strong earnings growth is projected to slow down rapidly in 2015 & 16.  However, I mention KRFT here to reinforce that this is the type of chart you want to focus on, especially if volatility makes you queasy.

Did you notice that I didn’t say “buy stocks in poor companies with a lack of earnings growth, high debt levels, and plummeting charts”?  Seriously, think about this for a minute.  Let’s say that your son is a star high school football player with an excellent GPA.  Do you look for a third-rate college for him?  No!  You look for the best college that will accept him, so as to maximize his football prospects, his career prospects, and his scholarship awards.

Stock investing works the same way.  A stock in a company with a strong balance sheet is going to go up sooner than a stock in a company with net losses.  A stock with a bullish chart is going to go up faster than a stock with a bearish chart.  Your money is, metaphorically, your football-playing son.  Give your money the best opportunity to deliver capital gains by concentrating your stock picks on financially-sound companies with bullish stock charts.

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Happy investing!

Crista Huff


Goodfellow LLC

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