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Stocks May See More Losses, but That's The Time to Buy

The stock market appeared to return to normal this past week, but many analysts believe continued credit worries will drive prices lower in the near term.

Wall Street
Wall Street

"The real issue is what we don't know," John Buckingham, chief portfolio manager at Al Frank Asset Management, told CNBC.com. "Are there more bombs to go off? You had an event that we may never see again in our lifetime where people were literally terrified of money market funds. Those fears are not over."

Although stocks will continue to react to the day's headlines, especially in the housing and lending areas, long-term investors should still be on the lookout for bargains.

"The best times to buy are when news is dismal," said Buckingham. "If you just pay attention to headlines, you end up buying high when things are great and selling when things are low."

In the meantime, be prepared for more losses in your portfolio.

"We don't think the last shoe has fallen," said Todd Sherman, vice president of the Private Client Group at RF Lafferty. "We actually expect the markets to test the lows one more time to get a double bottom, somewhere in the 12,700 to 12,800 range."

Waiting on the Fed

Of course, a lot will depend on what the Federal Reserve does. The Fed's surprise cut in the discount rate a week ago was credited with bringing a sense of calm to the markets this past week. Many traders now expect the Fed to cut the more important federal funds rate at the next policy meeting Sept. 18. But some analysts see such a move as a double-edged sword.

"If they don't cut, there will be disappointment," said Brett D'arcy, director of investments at CBIZ Financial Solutions. "There's 25 basis points baked in right now and there are people who actually believe we'll get 50 basis points. I think it's important that (Fed Chairman Ben) Bernanke wants to do this his own way and not be like Alan Greenspan."

But some think that the Fed might be better off making another cut in the discount rate, which is what it charges banks for short-term loans, than reducing the Fed funds rate, which has a big impact on consumer lending rates. That way, they argue, the Fed can keep liquidity in the banking system without having to change its economic policy.

"It's good that the Fed comes in and intervenes at times,"Greg McCoach, senior market analyst with The Mining Speculator, told CNBC.com. "But the bottom line is if they have to intervene too often, that says there is something fundamentally wrong."

If the economy shows signs of slowing, then the Fed is more likely to cut the Fed funds rate to spur growth.

"We have a counter-intuitive thought process where bad news on the economic data front is going to be good news for the market," said Arthur Hogan, managing director at Jefferies. "We're going to start to celebrate lousy numbers and that can be a real slippery slope too."

"People will be watching for indicators of slowing in growth," Michael Cuggino, portfolio manager at Permanent Portfolio Funds, told CNBC.com. "The real question is, 'Does a federal funds cut boost confidence enough so that people will get back to conducting business as usual?' I don't believe a cut in September is the right thing to do. I think there's enough liquidity in the system."

Looking for Undervalued Stocks

Amid all this debate about where the economy--and markets--are headed, there are some smart moves for investors.

Buckingham of Al Frank Asset Management likes a broad diversification of stocks that haven't performed well in recent weeks. His top recommendations include Citigroup , Valero Energy and Microsoft.

"All of these stocks are undervalued in our view," said Buckingham. "They are generally trading at single-digit P/E ratios and inexpensive relative to where they have historically traded."

Al Frank Asset Management owns Citigroup, Valero Energy and Microsoft in its funds.

Cuggino of Permanent Portfolio Funds also looks for companies that have been beaten down, particularly those that sell their products and services worldwide.

"Hewlett-Packard is growing revenues across business lines, while continuing to streamline its business. It is gaining market share from competitors."

Cuggino also likes Walt Disney. "It's a good long-term growth story," he said. "Disney is doing well in all of its business lines."

Permanent Porfolio Funds owns Hewlett-Packard and Walt Disney in its portfolios.

Jefferies' Hogan is bullish on the energy sector. "The interesting thing about energy is the consistent global demand we have for energy products," he said.

Hogan recommends Hornbeck Offshore Services. "The P/E ratios of some of the energy companies further downstream look tremendous," he said. "As we look at the entirety of the deepwater of Mexico, there are just some great bargains out there that have been created."

Hogan does not own Hornbeck Offshore Services.

If current market conditions make you squeamish, McCoach with The Mining Speculator says hold on to your cash. "I haven't seen a period where there is more cause for concern than now, but we'll get through this," he said. "In the meantime, you want to be in cash, get rid of debt and have some actual precious metals. Batten down the hatches and hold on tight."

Phyllis Burke Goffney is a news editor at CNBC.com. She can be reached at phyllis.goffney@nbcuni.com.

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