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Turn Fear Into Opportunity With These Stocks

By Dan Caplinger - Updated Nov 9, 2016 at 8:13PM

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Fear's back. Here's how to handle it.

After a year of blissful recovery from 2009's nightmarish lows, fear is back in full force. As much as you may be tempted to cut and run with any profits you've earned during the rally, times like this have generally been tailor-made buying opportunities in the past.

Running scared
The most recent weekly survey from the American Association of Individual Investors paints a bleak picture of investor sentiment. The latest survey showed that barely one in five investors was bullish about the market, while the number of bearish investors jumped by 15 percentage points to 57.1%. Both figures are not only much more bearish than average but are actually at their worst levels since March 2009, the absolute low of the market meltdown.

Ordinary investors aren't the only ones feeling anxious. In a separate survey of active money managers, the reading also fell to its most bearish level since the market's March 2009 lows. With professionals and amateur investors in agreement, is it time to take your money off the table?

Buck the trend
My view is pretty simple: if you have a reasonable allocation to stocks right now, don't mess with it. In general, when everyone is feeling fearful, that's a great time to throw away your fear and start trying to make money.

Certainly in the past, low readings for these surveys have been good times to buy. Take a look at some past readings:

  • Last July, the quick rally in the stock market gave back some ground for the first time. Sentiment went negative, but the rally continued.
  • In early November of last year, the rally took another pause. Shortly thereafter, stocks resumed their uptrend.
  • At the February lows earlier this year, the survey was quite bearish. Stocks proceeded to advance more than 10%.

And of course, the extremely low readings in March 2009 presaged one of the biggest rallies in stock market history.

Strong stocks that have been left behind
Some might respond that the market is at much higher levels now, and stocks are more expensive than they were at those March 2009 lows. But the reality is that many stocks have almost entirely missed the rally.

For instance, in the energy sector, oil prices have recovered strongly from their late 2008 lows. Yet despite huge jumps in net revenue and profits from the same quarter last year, ExxonMobil (NYSE: XOM) has seen its stock fall in the past 15 months. Chevron (NYSE: CVX) and Total (NYSE: TOT), which have also seen gains in their financial results, have picked up less than 10% from last year's lows.

Amid all the gloom, you'd think that defensive stocks would be extremely expensive. But Wal-Mart (NYSE: WMT) and Kimberly Clark (NYSE: KMB) trade at less than 15 times earnings, even though both pay fairly healthy dividends and have modest growth prospects as well. And even though few see Microsoft (Nasdaq: MSFT) as a traditional defensive play, at around 11 times earnings, the stock seems to be fully discounting prospects for slower growth while still giving investors a margin of safety.

Finally, even high-growth stocks can be had for reasonable valuations. At 22 times trailing earnings, Apple (Nasdaq: AAPL) seems like a steal to many growth investors who are used to paying much more for the 50% annual earnings growth the iMaster has produced over the past five years.

Profit from fear
If you've stuck with your investing plan throughout the past several years, you already know how important it is to stay confident even when things look dire. Those who held on during the depths of the financial crisis have managed to get back a good portion of their losses since 2007, while those who panic-sold at the lows may never recover what they lost.

As hard as it is, times like these aren't best for joining the crowd. By standing out and following your own path, you can turn scary times into unprecedented investment opportunities. While others cower on the sidelines, your portfolio will be poised to reap the rewards.

Don't just buy any stock. Brian Richards gathers several experts to find the one stock they like right now.

Fool contributor Dan Caplinger handles his emotions better than his 5-year-old daughter, usually. He doesn't own shares of the companies mentioned in this article. Microsoft and Wal-Mart are Motley Fool Inside Value recommendations. Apple is a Motley Fool Stock Advisor choice. Kimberly Clark and Total are Motley Fool Income Investor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy stares Fear in the face and says "Back off, dude."


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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$132.22 (1.85%) $2.40
Microsoft Corporation Stock Quote
Microsoft Corporation
$291.91 (1.70%) $4.89
Apple Inc. Stock Quote
Apple Inc.
$172.10 (2.14%) $3.61
Kimberly-Clark Corporation Stock Quote
Kimberly-Clark Corporation
$135.48 (0.63%) $0.85
Chevron Corporation Stock Quote
Chevron Corporation
$159.85 (0.14%) $0.23
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$94.00 (0.87%) $0.81
TotalEnergies Stock Quote
$54.02 (0.54%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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