Stock swoons can provide an excellent opportunity for investors to snap up shares on the cheap. But unfortunately, one study suggests that individual investors may now be too nervous to pounce on these tantalizing bargains.
As part of its 20 years' experience tracking shareholder attitudes, the Yale School of Management periodically asks institutional and individual investors whether they'd be willing to buy stock after a market drop of 3% or more. Both groups have long moved in tandem; when the market was high, in October 2007, they were both at 61%. But the two groups recently diverged, with 71.6% of institutional investors willing to buy on dips, compared to 57.5% of individual investors.
That's decidedly odd, since the market is roughly 30% lower now than it was in late 2007. You'd think that a market drop from this lower point would render any notable stocks (not to mention the entire market) even more attractive. I suspect that investors are just suffering from post-traumatic stress related to the market's 2008 implosion, and worried about a "double dip." While that's understandable, it's a bad idea to let emotions rule your investing decisions.
Rationally, stocks that have fallen are at least candidates for opportunistic buying. I've come up with four stocks that have dipped more than 10% over the past quarter. Each is rated with at least four (of five) stars on Motley Fool CAPS, and each also recently sported a price-to-earnings (P/E) ratio of no more than 20, and a three-year average revenue growth rate of at least 5%:
- Monsanto (NYSE: MON) might draw your interest, if you're not opposed to its bioengineered seeds. The agricultural giant faced an injunction against planting its Roundup Ready alfalfa seeds until it had conducted more research on their long-term effects, but the Supreme Court removed that injunction last week.
- Oracle (Nasdaq: ORCL) had investors worried about its acquisition of Sun Microsystems, but its latest earnings report shows that Sun's segment has returned to profitability. The database titan will also cut costs via layoffs related to the acquisition.
- Freeport McMoRan Copper & Gold (NYSE: FCX) shines brighter than ever, amid recently rising mineral prices and expectations for increased demand as the global economy improves. Major customer China will need plenty of copper as it builds out its infrastructure.
- Walgreen (NYSE: WAG) is facing tough competition from the likes of CVS Caremark (NYSE: CVS) and Express Scripts (Nasdaq: ESRX). But all are likely to benefit from health-insurance reform, which will add millions of new customers into the overall system, likely creating millions more new prescriptions.
If you're looking for compelling candidates for your portfolio, stocks that have recently slumped can be a great place to start your search. Some stocks fall for troubling and lasting reasons, but others are terrific powerhouses that have simply suffered a temporary setback.
Which fallen company have you been looking at, and why? Let us know -- leave a comment below!
