Wednesday, November 19, 2008

Panic Selling a Good Time to Buy

Historically, these periods of panic selling have proven to be excellent times to buy stocks. Right now we are not only seeing panic selling, which actually took place mostly last month, but forced selling. I think its more forced selling right now. Hedge funds and mutual funds are seeing massive redemptions, and many margin calls for individuals. During these periods the fundamentals get largely ignored. I heard Jim Rogers talking about this being a big factor in the commodities sell-off, and why this is a nice time to buy. He said commodities typically bottom first, and do well during periods of economic weakness as there is low supply. I can agree with that.

I'm still not touching bank stocks. Like I've said before, these companies have eroded any competitive advantages they may have had, and this will impact their earnings for many years.

I'm looking at a few stocks here. Eaton (ETN) is an industrial electrical company trading at 5x earnings and less than 1x book value. They have improved their business and balance sheet to preform well not on a cyclical basis but secular. They're working hard on energy efficiency, and I see a lot of money being spent under the new administration updating our power grid and increasing efficiency. If you need any further convincing, Warren Buffett has been buying this stock.

Same holds true for Swiss giant ABB (ABB). I've held this stock awhile, and under $10, where it closed today, its a steal.

I'd also dabble in some companies with no debt. Although they aren't immune from weakness in the economy, they don't have to worry about funding their operations by borrowing money, which is tough to come by right now. I picked up some Google (GOOG) today (they're sitting on $14bil in cash and no debt). I'm also looking to buy a little bit of T Rowe Price Stock (TROW). Again, earnings will be difficult here as money is being pulled from their funds, but they have a great company, no debt, and the market always gives this stock a premium, which should help it to recover quicker than many other stocks. Plus, a 3% dividend.

Its not a great economy, but if you're willing to holding through some ups and downs, its a pretty good time to buy stocks. But avoid the urge to buy banks or other trouble companies.

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