The market is undergoing another round of selling thanks to fears of a banking crisis in Europe and the prospect of a global double-dip recession. Who in their right mind can buy stocks at such a time?
The answer is you.
Time and time again it has been proven that the time to buy is when fear is at its highest. The volatility index, a measure of fear in the market, has been above 30 for what seems like forever. At some point the spell will be broken and stocks will rally once again.
With the S&P looking to bounce off its yearly low of 1,100, now might be the perfect time to go shopping for stocks. Even if we are simply range bound, buying stocks now can result in 10% to 20% gains in the course of only a few months.
What stocks should you buy today?
One sector hit particularly hard by recessionary concerns is the retail space. In particular, clothing retailers have been pummeled in the current environment. Many stocks are down significantly from their highs. While some of the selling might be justified, there are plenty of names doing well in the space that merit consideration for any portfolio.
In this market, stock correlation is the highest it has been since 1987. That means fundamentals are being ignored and fear is gripping individual stocks across the board. At such times, bargain hunters can exploit high correlation and inefficient pricing. To the extent a company is performing on an operating basis delivering solid growth in earnings, gains can be had buying stocks today.
Typically, news events like earnings reports can break the spell of a highly correlated market. A company with solid fundamentals is likely to trade higher in a down market when operating results are strong. You know times are tough when that is not the case.
Recently, Express (NASDAQ:EXPR) reported earnings for the quarter ending July 31. The company reported a profit that beat Wall Street estimates by two cents per share. In addition, Express raised guidance for the year. The reaction to the news initially was positive, but by the end of trading on the first day after the report was released, shares retreated.
Shares of Express are cheap. The company has beaten the average Wall Street estimate in each of the last three quarters. For the full year ending Jan. 31, 2012, Wall Street is looking for the company to make $1.61 per share. That number increases by 16%, to $1.86 per share, in 2013. At current prices, shares of Express trade for just 11 times current-fiscal-year estimated earnings.