Winning Stocks: Buying Back In on the Cheap

In Wall Street's bargain-basement sale, here's what the smart money is doing.

Oct. 15, 2008— -- There is a massive sale going on now on Wall Street, and if you have some spare cash to invest, many advisers say this is the perfect time to buy.

But with all the turmoil and trauma that has plagued the market in recent weeks, everyday investors need to be careful and thoughtful before throwing their cash into stocks.

"People should be doing what they're most comfortable with, which is probably staying with the tried and true companies," said Stephen Leeb, chairman of the investment committee at Leeb Capital Management.

Leeb said that last week the market "took no prisoners." Basically, the healthy companies fell along with the bad ones. Now, they are at a bargain.

He suggested purchasing stock in companies such as Johnson & Johnson, ExxonMobil and Warren Buffet's Berkshire Hathaway.

"These companies with limited risk would be certainly high on my shopping list," Leeb said. "Some of them have never been cheaper."

For instance, Berkshire Hathaway class B shares are now trading for about $4,000 a share, down from a high of $5,000.

Leeb also suggested defense companies including Northrop Grumman and Raytheon.

"These tend to be economically immune. So even if you're too early and even if the world is going through a very, very big shakeout, we're still going to need defense. These companies should be fine."

Northrop, for instance, is trading for about $45 a share, down from about $85 in December.

Utility companies are also a relatively safe bet. Leeb suggests FLP, which is a major wind producer, or Excelon, the largest nuclear utility in the country.

"These are companies that should do well in all but the most-unimaginably poor economic environments," he said. "You're getting a lot of safety with these stocks plus tremendous upside potential."

He called these "get rich slow stocks."

Fool's Errand

Tim Hanson, senior analyst at the Motley Fool, said, "Now is a fabulous time to be an investor."

But the stock market is not the answer for everybody.

"If it's money that you need to spend on your retirement, or on rent or on tuition or anything like that in the next three to five years," don't invest in stocks, Hanson said. "The market is extremely volatile. I don't know if anybody really knows exactly what is going to happen."

However, if you have 10 years to wait out the market's ups and downs, Hanson said this is the perfect time to invest.

"There are a lot of extremely cheap companies out there," he said. "On Friday, the market was trading without regard for quality or the future."

Hanson said to be on the lookout for "companies that have great brands, really strong balance sheets with lots of cash and no debt, and significant international presences."

He mentioned Nike, Coca-Cola and Luxottica, an Italian company that makes Oakley and Ray-Ban sunglasses, and glasses sold under various luxury brand names including Bvlgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Prada, Versace and Polo Ralph Lauren.

"Don't just buy the things you know," Hanson said. Investing in just those brands limits you to consumer-product manufacturers and doesn't help diversify your portfolio.

"For most individual investors who don't really have time or inclination to be studying companies on a daily basis, the best strategy is to figure out how much you have to invest and then dollar-cost average that money into the market in small chunks," he said.

Find a mutual fund that reaches out to a wide swath of the market, put some money in it and then set up recurring stock buys every week, two weeks or month.

Hanson suggests opening such a recurring account with the fund itself to avoid fees you might have to pay your broker.

'Go Slowly'

Susie Johnston, a certified financial planner with Cherry Hills Investment Advisors, is a bit conservative in her approach.

"I think it's a good time to start," Johnston said. "I would go very slowly. I don't think this is over yet."

Nobody can predict the market's ups and downs, so she suggesting buying a bit today, easing in, and being very diversified.

Instead of buying individual companies, Johnston suggests mutual funds in which a fund manager buys and sells a basket of individual stocks. One thing to watch for with funds: the fees that are charged. There are many low-fee funds out there, but some charge high fees that can eat into your profits.

A fund that charges 1 percent or less of the money invested annually in expenses, known as the expense ratio, is considered low-cost. Avoid "load" funds that charge you a percentage when you buy or sell.

"Just go slow. Don't panic. Be patient. The best investors are patient," Johnston said. "I had a client the other day tell me: patience and wine."

Katie B. Weigel, with LongPoint Financial Planning, also believes it's a good time to buy. But she doesn't look at individual company stocks or even mutual funds.

Instead, she suggests exchange traded funds, or ETFs.

ETFs are like mutual funds -- they hold a wide basket of stocks -- but they typically tend to follow certain indexes and often don't have an active manager, lowering your fees.

Weigel said ETFs are more transparent, easier to buy and sell and do not incur capital gains until you sell.

"Prices certainly hit rock bottom last week, whether or not they fall any further is anyone's guess," Weigel said, "but you can certainly purchase stocks, ETFs and mutual funds at very low costs right now and then be poised to participate in the upside of the market when it rebounds."