Oversold Market Leads To Opportunities

By Matthew McCall | May 22, 2012 AAA

Stocks around the globe have been taking a hit during the month of May, which has pushed the major stock indexes into oversold territory. This is torture for investors that were heavily invested in stocks. On the other side, there are investors looking for the market to once again become oversold because that equates to a buying opportunity.
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With the SPDRs S&P 500 ETF (ARCA:SPY) now down over 6% from a multi-year high it has brought down even the strongest of stocks. The key is to use this weakness to begin building positions in stocks that have been on your wish list. A few stocks that have been strong the last year and are being drug down with the overall market are at the top of my buy list that I will share.

Healthcare
Allergan (NYSE:AGN) has pulled back roughly 7% from an all-time high and is starting to build a base above support at the $90 area. The maker of Botox as well as breast implants is a direct play on the aging of the baby boomers. Fundamentally the stock trades with a PEG ratio of 1.52 and pays a minimal dividend of 0.20%. The combination of the long-term fundamental story behind AGN's products and its charts make it an attractive buy in the $88 to $90 range.

Cigarettes
Another company that has products that people will continue to demand is Philip Morris International (NYSE:PM). The maker of cigarettes and tobacco products around the world does not supply the type of product like AGN, but the demand is there. The stock trades with a PEG ratio of about 1.51 and has a hefty dividend yield of 3.60%. Technically the stock broke some initial support at the $86 level, however the volume was light on the selling and the approximate 7% pullback from the all-time high is acceptable. The key is to have a stop-loss at the $78.50 area.

SEE: Should You Buy The Pullback?

Consumer
When it comes to consumer electronics there is no name in the business that can keep up with Apple (Nasdaq:AAPL). The stock that was in the midst of a massive rally has since come back to earth and is now down around 17% from the all-time high set earlier this year. The stock broke support at $555 and could now see the low $500's before it attracts big buyers once again. Fundamentally the stock is a screaming bargain with a PEG ratio of 0.59. That being said, AAPL could become even more of a bargain in the coming weeks before it finds a bottom.

Security Software
Sourcefire
(Nasdaq:FIRE) provides cyber security to commercial and government entities around the world. In a world of cyber attacks on both corporations and governments it is not a surprise that their services are in demand. Technically the stock has pulled back nearly 12% from an all-time high, has filled a gap and is on important support at the $51 area. Fundamentally the stock is overvalued with a PEG ratio of 3.55. This makes FIRE more of a pure play technical buy setup over a fundamental buying opportunity.

SEE: Technical Analysis

The Bottom Line
Investors entering stocks on a pullback will typically do better than investors that chase stocks hitting new highs. That being said, investors chasing or waiting for pullbacks must choose a level at which they cut their losses if they are incorrect. I suggest stop-loss limits of approximately 10% for any new position that is entered during the current market pullback. This will give the stock enough wiggle room, but at the same time protect against any big losses.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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