Absent a bullish press release, virtually every stock is taking
it on the chin right now. There is no safe haven in large companies
or small ones, value stocks or growth stocks.
This is what happens in brutal markets. Buyers go on strike and
sellers rule the day. But when the selling pressure abates, savvy
investors are quick to rebuild positions in names that didn't
deserve such a beating in the first place.
Of course, some companies, sectors and funds have plenty to fear
from a possibly growing European contagion. For example, the Russia
Market Vectors Exchange-Traded Fund (
) is down by more than a third since mid-April. The Russian economy
is increasingly tied to European economies, and as the crises of
1998 and 2008 showed, the Russian economy can fall off the rails
But is there a similar justification for the -25% pummeling taken
by the iShares Brazil ETF (
) in recent weeks? Not at all. Brazil has solid finances, a growing
economy and has a much higher exposure to Latin America, which is
increasingly becoming a self-sufficient continent, focused more on
neighboring economies than on Europe.
Looking at U.S. stocks, investors should be much more concerned
about large cap names, many of which generate 30% or 40% of their
sales in Europe. Smaller companies -- those with a market value
below $1 billion -- typically lack the muscle to have a large
foreign presence. If the market starts to stagnate at current
levels, investors may first start to wade back into the smaller
stocks that are primarily focused on the U.S economy.
Stress-test your portfolio, and think about ways to reduce your
exposure to Europe. Key exporters such as Caterpillar (
), consumer names like Procter & Gamble (
) and large tech names like Microsoft (Nasdaq: MSFT) will all feel
the pain if Europe slips back into recession - especially when you
consider the stresses on many European banks that are ill-prepared
for yet another period of economic contraction. Another concern for
these U.S. big caps is their currency exposure. Look for downward
revisions to earnings estimates as analysts start to incorporate
the impact of a weaker euro.
It's tempting to chase the stocks that have been unfairly tarnished
in this rout. But know that stocks can fall further before they
rebound, so proceed cautiously, and don't get frustrated when
you're not able to buy at the exact market bottom. Sectors I'm
keeping on my radar include those that are more exposed to the
healthier U.S. and Asian economies.