How Investors Can Survive In a Stock Picker's Market

Despite all the recent ups and downs, the market has been mostly stuck in a rut during April.

The tech-heavy Nasdaq has continued to rally, but the Dow and S&P 500 have been mostly range-bound. And analysts think the market is likely to wait until earnings season is over before it gets in a decisive mood.

Wall Street Trader
Wall Street Trader

But investors don't have to wait. There are plenty of opportunities to buy good stocks on the dips.

"Stocks are cheap," says Dave Rovelli, managing director of US equity trading for Canaccord Adams. "A lot of these stocks are no-debt with a lot of cash. There's opportunities out there where you can make some big scores."

Finding those opportunities, though, requires some deft strategy. Here, then, are a few hints from market pros on how to be a stock-picker in this market.

Play Big Tech Names

As the market has bounced off its March lows, technology has led the other indexes, in part because some of the bigger names aren't as exposed to the economic deterioration as other sectors have seen.

Apple and Research in Motion are some of the best bets because of their strong cash positions, Rovelli says.

"They don't have a lot of debt and tech is leading the marketplace," he says. "That being said, these stocks have made tremendous moves. I wouldn't just jump into the market and buy them."

Instead, he recommends a common strategy these days--wait for the dips and then buy the market's more attractive names.

"You wait for the days when they hit every stock, when they're hitting the Apples and the RIMMs," Rovelli says.

Indeed, many portfolio managers are actually hoping for a temporary retreat, in part because that will be a symptom of a properly functioning market but also because it will provide a chance to jump in and buy some underpriced stocks.

"I'd like to see it pull back a little bit," says Chip Hanlon, president of Delta Global Advisors in Huntington Beach, Calif. "If you're going to be disappointed, it might be disappointment that you don't get that pullback you're hoping for."

Shop for Retail

Economic pressures are bringing good times for discount retailers, and not just Wal-Mart .

A host of other names are cleaning up as consumers worried about whether their jobs are safe start to avoid pricier stores and find way to stretch their paychecks.

Family Dollar and Dollar Tree are two names that are benefiting in the restrained retail environment, says Richard Sparks, senior analyst at Schaeffer's Investment Research in Cincinnati.

"You've got a lot of retailers that have tended to perform pretty well, especially those seemingly related to a smaller economy," Sparks says. "We've kind of gravitated down to the lowest end of the retailers as people are trying to save money."

Indeed, few believe that the broader market can move higher until some of the economic data points show real moves to the upside and don't merely register ahead of sharply diminished expectations.

"Although you can see encouraging signs in the economy and some data is turning higher, it's going to feel like a recession for corporations and the market for a long time," says Zach Pandl, economist at Nomura Securities International in New York. "The economy is still in difficult shape."

P&G, HP and a Whole Lot More

Find the Non-Participants

While financials, the big tech names and consumer discretionary stocks have performed extremely well since the rally off the March lows, some of the market's most reliable names have sat it out.

Procter & Gamble and Hewlett-Packard are two such companies that are due for a lift as some areas retreat and others gain the favor of investors looking for relative bargains, says John Massey, senior vice president and portfolio manager at AIG Sun America Asset Management in New York.

P&G is up less than 12 percent during the rally, trailing the S&P 500 performance by about half, while HP has gained 27 percent in the upswing but still trades at just 11 times earnings.

"If this rally is true these companies will probably play catch-up at some point," Massey says. "We're skeptical of the market rally so far. We don't necessarily think the economy has turned just yet. We think it will be a long basing period for the market."

Massey also includes pharmacy chain CVS on his list of companies that he thinks should do well now.

Hungry for Stocks? Try Restaurants

Economic weakness as well as a somewhat stiff trading range are two phenomena Sparks wants to ride, and he sees certain restaurant chains also benefiting in the environment.


For instance, Buffalo Wild Wings has nearly doubled in the past two months.

Similarly, a desire to find less expensive modes of entertainment should be beneficial for mail-order video rental firm Netflix.

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And Sparks even extends the argument to car care, where a company like AutoZone will get more business from people hanging onto their cars longer.

"The end of the bear market may be characterized by more of a grinding phase than a panic button," he says. "If that's the case there are going to be certain sectors, pretty narrow, that would outperform."

Others Will Wait

Investors have been busy putting money to work since the rally begin, but the new rangebound market has tempered some of that enthusiasm.

Portfolio managers who were adding to positions in recent weeks are holding their positions until the aforementioned pullback hits its stride. Some say that will happen after the bank stress tests are disclosed, while others believe it could come with an unexpected jolt of dismal economic news. Slideshows

"There's no fundamental good news, and the fact that we had a six-week rally, which we haven't had since the 1930s, and we moved up quite a bit suggests we need some retracing for this to be long-term stable," says Michael Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y. "It's probably relating to money chasing the markets and trying not to be the last person to get involved in this rally, which is not sensible for a long-term investor."

In the interim, then, investors likely will look to be nimble until there are signs of a long-term stabilization with the economy.

"We still haven't corrected one of the basic imbalances driving the recession. Housing prices are likely to continue falling," Nomura's Pandl says. "There are some green shoots, but it's not quite spring yet."