Remember the summer of 2011? Warren Buffett sure does. He
continues to speak of the sharp market sell-off in late July and
early August, and how he was a very active buyer on Aug. 8, 2011,
when stocks were "capitulating." Washington was a mess, which he
saw as a time to buy.
Just a few weeks later, the market still appeared to be in
trouble, and it would be several months before the market seemed
stable. But in hindsight, it was an awfully good buying
With the market once again in a Washington-induced freefall,
is it time to take a page from the Buffett playback? Not quite.
You'll know we've arrived at a monumental buying opportunity if
the markets plunge hard, and not just 1%, as has been the case on
some recent days.
Still, investors should be making the most of this time,
identifying a "wish list" of ideal stocks. Here's the
tried-and-true playbook that has been in use during past periods
of market turmoil.
|1. Look at the lows.
Some stocks were already experiencing headwinds even before
the current fiscal crisis took root, and with the nudge of
a falling market, now trade at 52-week lows. For example,
the slowing consumer-spending environment, which was
already being felt by many retailers, has created fresh
waves of selling in already beaten-down names.
Consumer-facing stocks making 52-week lows this week
Carnival Cruise Lines (
American Eagle Outfitters (
Look for the list of fresh 52-week lows to expand in coming
days, which should serve as a good source of research.
Body Central (Nasdaq: BODY)
|2. Watch the buybacks and
If history is any guide, we're going to be seeing a lot of
stock buyback announcements in coming weeks in tandem with
earnings season. Companies tend to do this when their stock
prices slump but their fundamental business outlooks have
In a similar vein, focus on stocks that already have big
buybacks in place, as they will tend to have more share
price support in a deeper market downdraft as their buying
efforts offset selling pressures. (I recently looked at
some of the currently most active stock buyback
This is also a good time to keep track of insider buying,
which can be seen as another way of executives saying "Our
business is holding up well." I took a look at some recent
insider moves, but I would add the caveat that even stocks
with strong insider buying can still fall as deeply as
others. (In this respect, big buyback programs tend to
provide more downside protection than insider buying
|3. Spend extra time on conference
The timing of this current market sell-off is fortuitous,
as companies can deliver a real-time perspective on any
impact the fiscal crisis may be having. As my colleague
Michael J. Carr noted recently: "If companies deliver
strong reports, stock prices should be able to withstand
the shutdown. If earnings disappoint, that will push stocks
down even though the headlines will continue to talk about
My guess: You'll be seeing a mixed picture, with some
companies noting little impact. And if their share prices
slump in tandem with the broader market, then you should be
prepared to pounce. Any buying window that is now open
might quickly close once Washington goes back to work.
|4. Focus on beta.
Depending on your mindset, you can use this market slump in
a defensive or offensive manner. For investors that want to
protect against deeper downside, focus on stocks with a
very low beta. That includes utilities and consumer staples
stocks such as
Procter & Gamble (
I prefer to use this time to focus on high-beta stocks, as
they are more likely to plunge at a relatively faster pace
as the Washington crisis continues. These high-beta stocks
surely carry further downside risk if the market really
falls out of bed, but they are also likely to post sharper
gains once the crisis officially ends.
|5. Run your screens.
This is a good time to seek out sectors and industries that
sport below-market multiples. For example, many industrial
stocks trade for 10 to 12 times projected profits, and in
some instances, multiples are moving below 10. In light of
the fact that the U.S. economy still appears poised for a
cyclical rebound over the next few years, these companies
should post solid sales and profit gains in the years
I also always focus on stocks that fall below tangible book
value. Many insurance stocks offer up this kind of value. I
focused on a range of below-book insurers a few months ago,
and many of them still remain below tangible book value
Risks to Consider:
The market is still nicely in the black on one- and
three-year bases, so investors may collectively decide to lock in
whatever profits they currently have, creating fresh waves of
Action To Take -->
To revisit Buffett's buying lesson from 2011, we may still be in
the early phase of a Washington-induced market swoon. That's why
it's wise to only start nibbling at emerging values -- but if the
crisis continues, fresh waves of bargains will emerge. Use these
guideposts to track where those opportunities are emerging.
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