Searching for Stocks in a Declining Market

When searching for stocks to buy, it is important to understand which stocks have declined due to valid reasons and which ones declined due to serious deterioration in fundamentals. Many equities look very attractive in today’s market due to their depressed prices, but some businesses have been hit by multiple negative factors in today’s investment environment. From a poor housing market, to heightened credit risks, to slowing growth around the world, along with high commodity prices, many companies are seeing a decline in their business.

However, some companies are weathering the storms well due to great products and non-cyclical businesses. Some are getting hurt, but not nearly as badly as the decline in their stock price may indicate. I have witnessed massive declines in stock prices for many companies whose actual businesses have only been mildly affected by the rough conditions. Most of these stocks show compelling value, especially when their business model is still intact.

Some common themes in these attractive companies include:

- Strong demand for products overseas – This will protect the company’s performance from prolonged periods of decline since their diversified operations will result in steadier earnings.

- A unique competitive advantage – This can include companies with a strong brand. Customers remain loyal to a strong brand despite financial conditions. Also, a company with a proprietary technology that is hard to copy or emulate has an advantage. The top 5 American brands ranked by Brandz are Google, GE, Microsoft, Coca-Cola and IBM.

- Poor performance by peers – Many companies are dragged down by the performance of their competitors because investors assume problems with their brethren means problems for them. This is not always the case.

It is important to investigate and understand the movements in stock prices and be able to take advantage of the potential mispricing.

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