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The market (as tracked by the S&P 500) has soundly retreated from the 1300 level. The high volume plunge could easily mean some more water treading until enough steam is built to make a consolidated breakthrough. Does this mean we simply sit on our hands and do nothing until then? Hardly.

First, we want to scan for some fundamentally strong growth stocks. We will pick from small firms with a close eye on fundamentals. We will pick exclusively from the S&P SmallCap 600/Citigroup Growth Index. No doubt, these stocks will fall fairly hard with the market. But watch these stocks to pick up as the market consolidates - these could be the next portfolio winners.

Stocks to Watch:

ArthroCare Corporation is a medical device company with a 750 million market cap. They have had multiple quarters of good earnings surprises. Growth for next year is expected to be 23%+. They were unprofitable in 2009, but they turned this around in 2010. Analysts have this as a moderate buy. With a short ratio of 11% and a fairly good support level at $26, this is definitely one to watch if prices fall much further.

GenCorp Inc. is another sub 300 million market cap stock with a trailing P/E of just over 10. This stock suffers from a severe lack of analyst coverage. The short percentage is 15.9; this could make for some interesting future action. Added volatility danger is from inconsistent earnings, and institutional selling over 10 million shares last quarter. Forward looking forecasts are getting harder to find. Although it is a vacuum of knowledge right now, support around the $4.50 level could make a nice buy point if prices slide in a market correction.

Healthcare Services Group Inc. provides good food and clean sheets for hospitals, nursing homes, rehab centers and the like. It is currently rated as a moderate buy. The last 4 quarters have seen a steady upwards trend in income applicable to shares. They have a 4% dividend yield which is welcome for income investors. They have a long history of raising total dividends (30 times since 2003). On the downside, they have missed analyst earnings a couple of times in the past year, and the valuations are somewhat tepid. Still, if the market pushes them down below $15, it might make a decent entry point based on long-term support levels.

Here are a few other picks with high FSCORE fundamentals in the S&P 600 Small Caps/Citigroup Growth Index.

Carefully analyze each of the above picks as to soundness. KLIC has blockbuster growth when comparing earnings year over year. Institutions are nibbling at it too. Relative earnings and revenue values look great. However, the recent bump backwards in the market might have sent this stock reeling for the short term, which could make a nice entry point soon.

The bottom line is to carefully analyze any pick that comes up on a fundamental scan. No automated screening is perfect. Second, be patient as prices may compress over the next while giving an excellent entry around a support level for the investor that is willing to wait. These are great buys, but maybe just not quite yet.

Source: 12 Cheap Small Cap / Growth Stocks to Buy in a Market Correction