Stocks plunging? Don't hide. Seek.
Stocks may be chaotic, but they also offer opportunities if you look in the right place. Plunging stocks now make some sectors appealing.
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To be sure, today's markets include wild cards that just might pop – or fizzle. Financial stocks, especially those of major banks, have taken a beating of late. Example: Bank of America stock lost 20 percent of its value over a few hours of trading on Aug. 8. Multiple factors have been at work, including worries about big banks' exposure to shaky European debt.Skip to next paragraph
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"There's huge opportunity and huge risk if you're talking about large, money center banks," Mr. Morse says. Best prospects, in his view, include firms such as JPMorgan Chase & Co., which aren't overly concentrated in one industry (e.g., housing) and have relatively clean balance sheets with few remaining bad loans or write-offs.
Some investors aren't ready to dive into the banking sector. South Texas Money Management is leery of financial stocks, Mr. Kee says, especially those with significant exposure to European sovereign debt or US mortgages. Other investors, however, think markets have been too hard on banks, including those that aren't on the hook for risky European debt.
"These stocks have been battered, and the market is pricing in too much negativity, long term, for their prospects," Mr. Sargen says.
Anxiety about sovereign debt has helped intensify risks in certain areas that promise strong returns. Kee includes in this category dividend-paying stocks with notably high yields.
"A stock can have a high dividend yield either because it pays out a lot, or because its price is cheap," Kee says. "If its price is cheap, there's usually a pretty good reason why: It's riskier. So going headlong into high-dividend-yield stocks is not the way to earn the kind of long-term returns that a lot of clients are looking for."
Silver also poses significant risks that some investors might not recognize, Morse says. Its price has soared in recent months, yet demand for the metal tends to be low in contrast with demand for gold, stocks, or bonds. Unloading silver at high prices can be difficult if the relatively small pool of silver investors turns fickle.
Bonds continue to offer opportunity, observers note, for investors seeking decent yields from solid issuers. US Treasury bills and notes are offering low yields because the "price of safety" is now paid in the currency of meager returns, according to Kee. Ultralow rates present their own risks in terms of inflation and foregone opportunities.
To gain a consistent 2.5 percent to 3 percent return, Sargen has been investing in bond funds with a time horizon of weeks or months. These tend to track indexes consisting of US government-backed debt or high-grade corporate paper. Morse also likes highly rated corporate bonds (BBB rating or higher), which can pay as much as 4 percent to 6 percent.
"It's not the same opportunity in high-yield corporate bonds, or junk bonds, that there was back [in 2008]," Morse says. "But high-grade corporate bonds is still a nice place to be."