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Studies have shown that beaten-down stocks may be a potential buy if an investor has the stomach for volatility and is able to withstand the slings and arrows of outrageous fortune in order to reap the benefits of long term value investing.

The caveat is that stocks that have experienced a precipitous decline are often riskier than other stocks. The reason is because there is an inverse relation between volatility and price. In other words, low price stocks have higher volatility, which is why these companies often have higher default risk due to an increase in financial leverage. For instance, stocks which are trading below $1 in Nasdaq may announce a reverse stock split in order to gain compliance with listing requirements, and they are also perceived to be more risky trades.

Some contrarians believe that most investors overreacted and irrationally sold off the stocks due to market sentiment. They believe that one should buy stocks that have been knocked down the most, and are out-of-favor, unloved, or misunderstood. Such contrarian views are espoused by Steven Romick of FPA Crescent Fund and Bruce Berkowitz of Fairholme Capital Management LLC.

Thus, a cursory glance at the top 5 industries at a 52-week low may give insights for investors to sieve through for value stocks using a top-down investing approach.

Industry at 52-week low

# of Stocks at 52-Week Low

Banks

90

Industrial Goods & Services

38

Financial Services

30

Technology Hardware & Equipment

27

Insurance

23

Source: GuruFocus

However, if you are risk-averse, then perhaps ETFs may be more suitable for your portfolio. Do note that the industry ETFs suggested below are non-exhaustive.

Click charts to enlarge

SPDR KBW Bank (NYSEARCA:KBE)

Fund Summary

The investment seeks to replicate, net of expenses, the KBW Bank index. The fund generally invests substantially with at least 80% of its total assets in the securities comprising the index. The index is a float adjusted modified-market capitalization-weighted index, which measures the performance of publicly traded companies that do business as banks or thrifts. The fund is non-diversified.

Fund Overview

Category:

Financial

Fund Family:

State Street Global Advisors

Net Assets:

1.51B

Yield:

0.87%

Fund Inception Date:

Nov 8, 2005

Legal Type:

Exchange Traded Fund

Vanguard Financials ETF (NYSEARCA:VFH)

Fund Summary

The investment seeks to replicate, net of expenses, the MSCI US Investable Market Financials 25/50 Index. The fund invests all, or substantially all, of its assets in the stocks that make up the index. The index consists of stocks of U.S. companies within the financial sector. This sector includes companies involved in banking, mortgage finance, consumer finance, specialized finance, investment banking and brokerage, asset management and custody, corporate lending, insurance, financial investment, and real estate. The fund is non-diversified.

Fund Overview

Category:

Financial

Fund Family:

Vanguard

Net Assets:

674.15M

Yield:

1.56%

Fund Inception Date:

Jan 26, 2004

Legal Type:

Exchange Traded Fund

Vanguard Industrials ETF (NYSEARCA:VIS)

Fund Summary

The investment seeks to track the performance of a benchmark index that measures the investment return of industrial stocks. The fund employs a passive management investment approach to track the performance of the MSCI® U.S. Investable Market Industrials 25/50 Index. The index is made up of stocks of large, medium-size, and small U.S. companies within the industrial sector. The sector includes the manufacture and distribution of capital goods; the provision of commercial services and supplies; or the provision of transportation services. The fund is non-diversified.

Fund Overview

Category:

Industrials

Fund Family:

Vanguard

Net Assets:

521.03M

Yield:

1.32%

Fund Inception Date:

Sep 23, 2004

Legal Type:

Exchange Traded Fund

Vanguard Information Technology ETF (NYSEARCA:VGT)

Fund Summary

The investment seeks to replicate, net of expenses, the MSCI US Investable Market Information Technology 25/50 Index. The fund invests all, or substantially all, of its assets in the stocks that make up the index. The index consists of all capitalizations of stock in the technology sector. It includes companies involved in technology, software, Internet applications systems, databases, consulting, data processing, and outsourced services. The fund is non-diversified.

Fund Overview

Category:

Technology

Fund Family:

Vanguard

Net Assets:

1.95B

Yield:

0.57%

Fund Inception Date:

Jan 26, 2004

Legal Type:

Exchange Traded Fund

SPDR KBW Insurance (NYSEARCA:KIE)

Fund Summary

The investment seeks to replicate, net of expenses, the KBW Insurance index. The fund generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index is a float adjusted modified-market capitalization weighted index, which measures the performance of U.S. publicly traded companies in the insurance industry. The fund is non-diversified.

Fund Overview

Category:

Financial

Fund Family:

State Street Global Advisors

Net Assets:

160.58M

Yield:

1.84%

Fund Inception Date:

Nov 8, 2005

Legal Type:

Exchange Traded Fund

Sources of financial data/fund overview are taken from Yahoo Finance and candlestick charts from StockCharts.com


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Investment Ideas From The Top 5 Industries At A 52-Week Low