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When the Blue Chips Are Down

From Standard & Poor's Equity Research

As rising interest rates and mounting inflation put a chill on global markets, escaping to the beach or boardwalk sounds increasingly appealing to investors. But for those who look at recent market volatility as a buying opportunity, we can offer some investment ideas.

In the summer months, expect lighter volume and increased volatility, says Sam Stovall, chief investment strategist at Standard & Poor's. However, Stovall believes that regardless of what direction the markets take in the coming months, investors could take advantage of the volatility by considering a value investing strategy.

"We think that investors could shore up their portfolios with stocks in industries that have lost ground during the recent volatility but that our analysts still consider buys or strong buys," Stovall explains.

To this end, The Outlook screened for the 10 most volatile, yet most favored, industries. We looked for those industries that, by the end of May, had fallen more than 5% since the market peaked on May 9. But we limited our search to those industries for which the average STARS ranking of stocks in that group was four or better (see table below).

"The resulting stock picks typically present an enhanced opportunity for investors to profit by buying when the price is deflated," Stovall says.

If this style of investing appears counterintuitive, the strategy actually is not. Value investors actively seek positions in assets that they believe the market has beaten up. For example, the "Oracle of Omaha," billionaire investor Warren Buffett, considers himself a value investor. He has stated publicly that he believes sometimes investors overreact to good and bad news, causing volatility that does not jibe with long-term fundamentals.

Where S&P Sees Value

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