While most long-term investors should stay on the sidelines during the current market turmoil, analysts say there are opportunities to find some bargains amid the carnage.
"Fear creates opportunity," Michael Embler, chief investment officer at Franklin Templeton Investments, told CNBC.com. "If you are a long-term investor, you should be turning off your screen. But if you want to buy stock, this is an opportunity."
Stocks tumbled this past week, retesting the recent closing low of 13,181 on the Dow reached on August 3rd. The markets have been roiled by increasing anxiety over tightening in the credit markets as hedge funds in the U.S. and Europe were impacted by the subprime mortgage crisis.
"Right now the risk/reward ratio just isn't there for the Mom and Pop investor," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "Nobody wants to call themselves a market timer, but nobody wants to step up and buy a stock today to see their head handed back to them tomorrow."
Analysts say investors would be wise to reassess their portfolios before taking action in this environment.
"The best advice is to ride it out, but if you really can't sleep at night then do something," said Hugh Johnson, chief investment officer at Johnson Illington Advisors. "Reduce your exposure to stocks. Among the stocks that you keep, overweight large safe companies like consumer staples such as a beverage company. Underweight financials and economically sensitive stocks."
"I think this is a good time to do your research," said Steve Goldman, chief market strategist at Weeden & Company. "It's going to take a month or so to sort things out. In a few weeks, approach this with a clear head and don't be excited by all the gyrations. This will all hopefully bear fruit for stocks in the fourth quarter."
Analysts say investors looking to buy stocks need to be especially selective.
"I just really like the solid names," said Pete Najarian of Najarian Capital and a regular on CNBC's "Fast Money." "Look at Coca-Cola hitting a 5-year high. Look at Hewlett-Packard and IBM. The 'Warren Buffet-style' names are still performing, even with all the negativity we're seeing in the marketplace."
Franklin Templeton's Embler likes companies that have been beaten down in the recent volatility, but still exhibit strong underlying fundamentals. One of his favorites is lumber and paper producer Weyerhaeuser . "As a result of their exposure to housing, the stock has come down about 20-25% in the past month or so," said Embler. "It's got premier timber and manufacturing assets. It's got very strong underlying asset value."
If you're looking for a play in the battered financials sector, Embler recommends US Bancorp. "They are very diversified because of their payment processing and asset management businesses. They don't have a lot of subprime exposure."
Embler also likes News Corp. and Time Warner. "These are big diversified media companies," he said. "It's an area the market has loved to hate. Both stocks are off their highs and both have attractive assets."
Franklin Templeton owns all of Embler's recommendations in their funds.
Adam Lass, senior market analyst at Wavestrength Options Weekly, likes stocks that have weathered the recent volatility well. He recommends military-related stocks including aerospace/defense contractors Raytheon and Northrop Grumman and conglomerate United Technologies.
"These stocks have survived this whole episode rather nicely," said Lass. "We have active war fronts going on in Afghanistan and Iraq and saber rattling with Iran. We have some presidential candidates that are talking about leaving Iraq, but no candidate is talking about reducing the military. I think these are good long-term buys."
Lass does not own Raytheon, Northrop Grumman or United Technologies.
Safe Haven, Scary Times
Safety in Technology
Technology stocks have suffered with the rest of the market, although some analysts believe the sector could be a safer haven than other areas because most tech stocks are not tied to the housing industry.
"The technology companies that were hit hard were those stocks that were large holdings in some of the hedge funds rumored to have problems," Richard Parower, portfolio manager at Seligman Global Technology Fund, told CNBC.com. "We're starting to see buyers come back into stocks like McAfee and Symantec. If you're willing to hold on to these stocks for 12 months, I would recommend them. They have good, strong free cash flows and valuations are good."
Seligman Global Technology Fund owns McAfee and Symantec.
Rob Sanderson, media and communications analyst with American Technology Research, says investors should stick with tech stocks that can withstand a consumer downturn. He recommends Research in Motion and Google.
"RIMM has a lot of enterprise exposure, not as much consumer," said Sanderson. "Google is growing phenomenally well outside of the U.S. I think e-commerce, in general, weathers a consumer downturn better as people go online to look for the better deals."
Credit Scare Not Over
Whether you're sitting out the turmoil or looking for bargains, analysts say investors should expect credit concerns and fallout from the U.S. subprime mortgage industry to continue to dominate the markets in the coming days.
Next week, Wall Street will get another reading on inflation when the Producer Price Index and the Consumer Price Index reports are released. Earnings season is winding down, but reports will be coming in from many retailers including Dow components Home Depot and Wal-Mart.
Analysts say data and earnings will not likely rule the market next week.
"Of course we worry about inflation and earnings," said Johnson of Johnson Illington Advisors. "But now they're so overwhelmed by events in the credit markets, these other things are a sideshow."
"The data has been remarkably stable," said Wavestrength's Lass. "There are simply no shocks there. There is no news happening in the CPI or the PPI. The news is in the banking industry. Did the major hedge funds buy enough of this lousy debt to really hurt the banking system? If that's true, the Fed will act."
Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at firstname.lastname@example.org.