Despite the huge rally in stocks this week, the Dow and are still down 6 percent for the year and the Nasdaq is off 10 percent. Veteran fund managers tell CNBC's "Power Lunch" on Thursday, this is the time to buy beaten-down stocks with the potential for outsized returns.
Craig Hodges, portfolio manager of the Morningstar 4-star rated Hodges Small Cap Fund, is looking at Texas-based companies.
"We see weakness in energy appears as a supply driven problem that will take time to correct. However, there are many facets of the U.S. economy that will benefit from lower oil prices, and are reporting solid earnings guidance for the balance of the year," Hodges said.
Read More Stocks extend losses as oil holds lower; Nasdaq falls 1%
He likes ClubCorp Holdings and Independent Bank Group, companies that have disconnected from their fundamentals because of their perceived exposure to energy.
Michael Cuggino, president and portfolio manager of the Permanent Portfolio Funds, is also focusing on out-of-favor stocks.
"We would be looking for stocks that have outsized return potential given growth prospects and the broader sell-off over the couple of months," Cuggino said.
The top picks for Cuggino include Ryder System, Facebook and Under Armour.
ClubCorp, Independent Bank Group, Ryder System, Facebook and Under Armour are lower during trading.