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For the umpteenth time, the Dow passed the 10,000 level yesterday, this time on its way down. But as people begin to fear a next phase of the market meltdown, now's a good time to remind yourself of the lessons you learned from 2008 and 2009. Even if you missed out on bargain stocks back then, it's beginning to look a lot more likely that you'll get a second chance.
The wall of worry
Investors have a lot of concerns on their plates right now. The latest is the reemergence of deflationary fears, as Treasury bond rates have fallen to extremely low levels, with some issues actually hitting record-low yields. Even though reported economic growth has been fairly strong over the past three quarters, job creation is still lagging behind, causing concern that the economy may start contracting again.
Add that to the current financial reform debate in Congress, European troubles, and worries about China's growth and the impact a slowdown there could have on the rest of the world, and it's easy to understand why the stock market has dropped sharply.
A market of stocks
But the first thing to remember about market downdrafts is that they're largely indiscriminate in pulling stock prices down. With nearly every major stock belonging to some index, everything from ETF activity to institutional trading can pull entire baskets of stocks lower.
If you can find stocks that don't actually deserve to see price drops, then market swoons can spell opportunity. Several groups of stocks qualify, including the following.
1. Winners from the last recession.
One thing many people learned from 2008's bear market is that even a severe recession has winners. Yet for some reason, with recession worries returning, investors are punishing some of the same stocks that did so well during the last recession.
For instance, Wal-Mart (NYSE: WMT ) shares rose 20% in 2008, as shoppers downgraded from luxury retailers to conserve cash. Over the past three months, however, Wal-Mart has fallen nearly 13%, reflecting concerns that people are returning to pricier competitors such as Coach. If a recession will reverse that flow, then you should expect to see shares rise, not fall.
Similarly, McDonald's (NYSE: MCD ) has fallen nearly 6% in the past two weeks. Yet it too performed extremely well in 2008's downturn, and like Wal-Mart, it boasts both cheap valuations as well as an attractive dividend yield. More importantly, it's even bucked negative trends to post continuing growth recently.
2. Cash-rich companies.
Part of the problem that companies faced during the financial crisis in 2008 was liquidity. Companies that needed capital suddenly couldn't get it, and those that had capital kept it under lock and key.
But even companies with impressive cash hoards have been taken to the cleaners lately. Microsoft (Nasdaq: MSFT ) shares have fallen 23% in just two months despite its $37 billion in cash. Cisco Systems (Nasdaq: CSCO ) is down 20%, while Oracle (Nasdaq: ORCL ) has dropped 16%. If deflation strikes, then their cash will leave these companies in a much better position than some of their debt-laden competitors.
Of course, a slowing economy would likely cut technology-related spending, hitting revenues. But more than offsetting that short-term drop is the chance that these companies could make promising acquisitions on the cheap. Just as Wells Fargo (NYSE: WFC ) and JPMorgan Chase (NYSE: JPM ) reaped huge rewards from picking up dying competitors at bargain-basement prices back in the fall of 2008, so too should companies with cash see a second market meltdown as a rare chance for a second bite at the buyout apple.
Don't lose faith
If yesterday's dive proves to be the beginning of something bigger, then you'll face a crisis of confidence as you wonder whether even stocks as secure as these will make good investments. You might not make money tomorrow by buying these stocks today. But eventually, when the market comes to its senses, it will recognize how smart buyers of quality stocks were to stick out another round of volatility.
Some stocks do deserve to get slammed. Tim Hanson identifies which stocks are really dangerous right now.