Roughly a 6% pullback for the broader market in the grand scheme of things is not a major move. However, when you are in the midst of the pullback it can feel like a 26% pullback. This emotional reaction will cause investors to panic and sell into the most normal and healthy of market pullbacks.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
Investors that are able to see through the noise of the media during the pullback can find stocks that are bucking the trend and continue to act well. The key is to find stocks that have shown relative strength versus the overall market and are setup to rally when the pullback ends.
Cyberonics (Nasdaq:CYBX) is a medical equipment company that sells implantable devices that provide nerve stimulation treatment for refractory epilepsy and depression. The stock is hitting a new six-year high as the market struggles to hold support. Not only is the chart overly impressive, the PEG ratio is a very acceptable 1.17. The combination of technical and fundamental indicators has CYBX setup for higher prices. The key will be to buy on a small pullback.
Ecolab (NYSE:ECL) is a cleaning products company that supplies a number of industries that include healthcare, hospitality and energy. The stock is roughly 4% off an all-time high and has one of the best-looking, consistent charts in the market. A PEG ratio of 1.43 is acceptable and could allow ECL to continue hitting new highs. Whether the economy slows or not, I feel the demand for cleaning goods will remain fairly steady.
Pepsico (NYSE:PEP) is the mega-cap food and beverage conglomerate that owns brands such as Doritos, Quaker and Pepsi. The stock is trading at a fresh 10-month high as money has been rotating out of high-risk sectors and into more conservative sectors such as consumer staples. The 3.2% dividend yield is attractive considering the extremely low yields. The one caveat I have with the stock is the PEG ratio of 3.44, which is too high for my liking. That being said, stocks can continue to rally if they are in the right sector, so keep an eye on PEP.
U.S. Bancorp (NYSE:USB) provides financial and banking services in the United States to retail and institutional clients. The stock has not held up as well as the first three examples, but as far as the banks are concerned, USB has been an outperformer. The approximate 4% sell-off in its stock price is much better than the likes of the big name financials and the overall market. Fundamentally, USB is attractive with a PEG ratio of 1.13 and a dividend yield of 2.5%. Even though the stock does not have the same risk exposure as the international banks, it could be drug down with the overall sector if the sell-off continues.
The Bottom Line
I am a believer in buying into beaten down stocks that remain fundamentally strong and the overall technicals are not broken. At the same time I also believe in investing in the leaders, which during a pullback are the stocks that show the most resilience. Typically, when the market turns around it will take the entire market with it, especially the strongest stocks in each sector.
At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.