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Buy Quality on Pullbacks, Not Stocks in Their Death Throes

Start by admitting some 'bargain' stocks will never bounce back

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In these turbulent times, a lot of fear is undoubtedly out there. The vast majority of investors are running for the exit or at the very least taking shelter in “safe” investments like Treasuries, high-yield consumer-staple stocks or gold.

But there’s a small group of folks willing to take a few chances, believing some good stocks are oversold and trying to buy their way into the bargain of the century.

Don’t do it. Bottom-fishing is for suckers right now.

To be clear, some high-quality stocks have surely sold off a bit, and this may not be a bad time to get in. For instance, Apple  (NASDAQ:AAPL) is one that I personally have bought. Back in May, I snapped up AAPL at around $550. But that’s not exactly “bottom fishing,” since Apple started 2012 at $405 and was trading around $335 a year ago. It was just a small but short-lived pullback.

I have other similar stocks on a watch list. For instance, if the market craters, I would love a chance to get Coca-Cola (NYSE:KO) for under $70 before it splits 2-for-1.

But when I refer to bottom-fishing, I mean it as a pejorative phrase. Think dumpster-diving rather than perusing a sale rack at Neiman Marcus.

Wall Street is littered with the carcasses of fixer-uppers gone wrong. Naïve swing traders sometimes think a big brand cures all ills and that “restructuring” actually means something.

Take Hewlett-Packard (NYSE:HPQ). I called this tech turd the embodiment of everything that’s wrong with Corporate America, and blasted the latest turnaround as another failed “restructuring” fiction. The stock is now below $20 a share for the first time since 1995. HPQ stock is -24% year-to-date, -44% in the last 12 months, and -57% in the last five years.

So… at what point was the right time to bottom-fish this monstrosity?

For a more current example, check out the drops in Research In Motion (NASDAQ:RIMM) and Nokia () Monday. BlackBerry maker RIMM fell 8% ahead of its earnings report. Nokia was down about the same. Both stocks have been cratering for a long time, too. Just take a look at this ugly table:

Plenty of people have been talking about potential in RIMM or Nokia for the last few years. Heck, even some writers at InvestorPlace have made “contrarian” calls on the stock as a swing trade opportunity. But all those folks who asked how much farther these stocks could drop keep getting the same answer: They can drop farther.

Much farther.

Contributor Charles Sizemore gets big honesty points for his excellent mea culpa about Research In Motion just last week, admitting he had fallen victim to the dreaded value trap when he recommended the pick last July.

“In the end, the best defense against a value trap is emotional discipline,” Charles wrote. “Look at your investments critically and don’t make excuses when they fail to perform.”

Article printed from InvestorPlace Media, http://investorplace.com/2012/06/buy-quality-on-pullbacks-not-stocks-in-their-death-throes/.

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