Stocks to Avoid and Stocks to Take a Look at in this Downturn

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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 ( RSX ) is off nearly -6% today and 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 pretty quickly.

But is there a similar justification for the -25% pummeling taken by the iShares Brazil ETF ( EWZ ) 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 the 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. Then again, investors tend to stick with the bigger names in market routs as they offer greater perceived safety. Yet if the market simply becomes stagnant and remains at current levels, investors may start to wade back into the smaller stocks that are primarily focused on the U.S economy. And as a series of government reports are expected to show this week, the U.S. economy is starting to glide back on to a sustainable growth path.

Action to Take --> Stress-test your portfolio, and think about ways to reduce your exposure to Europe. Key exporters such as Caterpillar ( CAT ) , consumer names like Procter & Gamble ( PG ) 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. Names on my radar include companies that are more exposed to the healthier U.S. and Asian economies.

They include: Charles Schwab (Nasdaq: SCHW) , Southwest Energy ( SWN ) , American Superconductor (Nasdaq: AMSC) , Assured Guaranty ( AGO ) , Deer Consumer Products (Nasdaq: DEER) , DryShips (Nasdaq: DRYS) , Wendy's ( WEN ) , DirecTV ( DTV ) and Dell (Nasdaq: DELL) . All of these stocks have been pulled south in the market sell-off, but still sport nice growth prospects or rock-bottom valuations.



-- David Sterman
Contributor
StreetAuthority

Disclosure: David Sterman does not own shares of any security mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Stocks


David Sterman

David Sterman

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