If you're a fan of buying beaten-up blue chip stocks, there's certainly no shortage of them now. The Dow Jones Industrial Average (^DJI -0.11%) is down nearly 8% from last month's high -- a sell-off that actually got going in mid-February. It's seemingly still falling, too, with the index hitting a multiweek low this week.
Roughly half of the Dow's components are doing worse than the average -- and that can pose a tricky temptation for investors.
On the one hand, we all know much of the recent selling is far too indiscriminate, fueled by fears that a banking crisis could spark broader economic weakness. On the other hand, stepping into stocks while they're in freefall is exactly what the old investment adage "don't try to catch a falling knife" is warning us against.
The thing is, that particular mindset looks at things through the wrong lens. You should be willing to buy Dow's biggest recent losers if (and only if) you were interested in them before their big pullbacks, but you shouldn't be quite so concerned about when this selling took shape.
Worst of the worst
In case you're wondering, February's worst-performing Dow stocks were Amgen (AMGN -0.19%), Home Depot (HD -1.77%), and Intel (INTC 0.64%). Shares of Amgen and Home Depot both lost a little more than 8% of their value while Intel lost nearly 12%. The Dow as a whole experienced a more modest setback of 4%.
The bulk of Intel's stumble stemmed from management's decision to cut its future dividend payments to only one-third of their prior size, although that move ultimately reflected Intel's subpar fiscal results in a tough tech market. Blame Home Depot's lousy 2023 profit guidance for its sell-off last month. And Amgen? Its outlook for the current year isn't exactly thrilling either, but its decision to issue a mountain of new debt to fund its upcoming acquisition of Horizon Therapeutics is arguably weighing on the stock as well.
The funny thing is, much has changed among the Dow's constituents just since the end of February -- the index got a whole new set of big losers. Shares of The Travelers Companies (TRV -0.41%), Dow (DOW 0.42%), and Goldman Sachs (GS -0.23%) have lost even more ground in less time. They're down 10%, more than 11%, and more than 12%, respectively, just in the first half of March. Again, the fallout from the failure of SVB Financial's Silicon Valley Bank has a lot to do with the weakness of the three Dow Jones components.
The overarching question remains though: Are any or all of these pullbacks buying opportunities that retail investors should be pouncing on?
In a word, yes.
An emotionally charged sell-off
That's not the usual answer to this particular question. In most instances, investors shouldn't step into a stock simply because it has been beaten down more than most, nor because it lost ground over a set time frame (in this case, a calendar month).
The circumstances of the past four weeks were anything but ordinary, though. While the steep sell-off was understandable in that it was sparked by worries of a banking crisis, deteriorating international relations, and general economic weakness, what the market has seen since mid-February has mostly been panic selling. And periods of panic selling are often relatively short-lived.
Sure, sometimes situations like this go from bad to worse. That happened several times back in 2007 and 2008, for example, in the wake of the subprime mortgage crisis. Just when it looked like the Dow Jones Industrial Average's bear market decline had reached bottom, it began sliding to even lower lows.
More often than not, though, these sorts of setbacks don't lead to more and more selling. That was the case back in 2011, in 2015 and 2016, and a couple of times in 2018. Not even the arrival of the COVID-19 pandemic in the United States in early 2020 kept the stock market down for long, even though that panic did give it one really good wallop.
Also, keep in mind that most of whatever economically driven bear market we were due or are still due may already be priced into stocks. The Dow fell more than 20% from peak to trough in 2022. But we're still closer to that low than the index's pre-bear high. It's arguable that the market's bounce and subsequent pullback since October were simply the volatility you'd expect as stocks transition from a bear market into a bull market. It takes a while to get everyone on the same page.
Stay cool -- this is a game long-term players usually win
Don't misunderstand. Goldman Sachs, Amgen, Intel, and any of the Dow's other poorly performing stocks of late may soon be priced even lower than they are now. The housing market will likely remain cool for a while, crimping Home Depot's performance. It remains to be seen how vulnerable Goldman Sachs is to the potential spread of a banking sector breakdown. Intel's undoubtedly a victim of slackening tech spending. That's the risk in bottom-fishing -- it's not always clear where the bottom is, nor when the bottom will be made.
As an investor though, one of your most important jobs is remaining level-headed enough to understand what's really happening with the market at all times. Many veteran investors recognize that what's happening to even the bluest of the blue chips right now isn't as dire as the headlines are making it out to be. The market's pundits have a tendency to spice things up a bit in an effort to draw a crowd. The sheer size and speed of the selling tide take care of the rest.
The thing about outgoing tides is, they always eventually come back in.
That's a long way of saying that if you were thinking about buying any of the aforementioned stocks for the long haul before their recent sell-offs, they're even more buy-worthy now, even if none of them have hit their cyclical bottoms yet. These emotionally charged waves of worry tend to pass relatively quickly.
