Stocks To Consider Buying On The Dips

Includes: GES, MOS, UFS
by: John P. Reese

If you're like most investors, the nonstop headlines about the European debt crisis have been leading you to cash out a good chunk of your U.S. stock holdings over the past few months. From March through May, investors collectively pulled a net of about $44 billion from U.S. domestic equity mutual funds, according to the Investment Company Institute.

It's easy to understand why investors were rushing for the door, with fears rising that Europe's woes would push an already slowing U.S. economy into recession. But if you want to beat the market over the long haul, doing what most investors are doing is a very bad recipe. Whitney Tilson understands that very well. Tilson's hedge fund has produced exceptional long-term returns, and he's done it by sticking to a disciplined, value-focused approach and not being swayed by the crowd. Whether by shorting popular financial and homebuilder stocks a few years back or by loading up on financials last summer amid the U.S.' debt ceiling fiasco, Tilson has stayed far ahead of the market by avoiding what most event investors are rushing into, and buying stocks that most investors fear.

It should be no surprise then that as the market has headed lower -- and his own portfolio has taken a hit -- Tilson hasn't been heading for the door, but instead adding to some of his favorite positions as they've fallen. In fact, asked in a recent CNBC interview when he cuts his losses on holdings that fall in the short term, he responded, "We don't. If we still have conviction in the stocks we hold, we selectively add to them, and that's what we've been doing."

Many of the world's other most successful investors have practiced such an approach -- after all, if you like a stock at, say, $40 a share, shouldn't you like it even more at $30 a share? Provided that the stock's fundamentals remain similar, it simply means you're getting a better deal with bigger potential returns. Most investors, however, don't have the emotional fortitude to buy more of a stock that is tumbling lower; they sell falling shares at a loss, and then miss out when the stock rebounds (which is what often happens if the stock is financially and fundamentally sound).

The most well-known advocate of such an approach is probably Warren Buffett. Buffett has famously said that investors should be greedy when others are fearful, and fearful when others are greedy. He's even acknowledged that he will root for some of his holdings to fall in the short term so that he can buy more of them -- as long as the stock's underlying business and fundamentals remain strong.

In the dozen-plus years that I've been studying history's most successful investors, I've found that far more often than not they use an approach like Buffett or Tilson -- that is, they buy fundamentally sound stocks that others are shunning. Most of my Guru Strategies, each of which is based on the approach of a different investing great, reflect this. Given the market's recent declines, I thought it would be a good time to look at some stocks in the U.S. and Canada that have been falling in price, but which continue to get high marks from my models. Some of them have started to bounce back in the past week, but after the past few months it still takes courage to jump into beaten-down stocks like these. Over the long run you could reap great benefits from them, however.

The Mosaic Company (NYSE:MOS): Minnesota-based Mosaic is the world's leading producer and marketer of concentrated phosphate and potash, key nutrients involved in growing crops. The $21-billion-market-cap firm's shares have fallen about 9.5% since April 1 while the S&P 500 has fallen about 6.6% (through June 21). But the model I base on the writings of Benjamin Graham -- the man known as the Father of Value Investing -- remains high on the stock. It likes Mosaic's 3.7 current ratio (a sign of good liquidity), strong balance sheet ($4.3 billion in net current assets vs. $1.0 billion long-term debt), and cheap shares (it trades for 11.8 times three-year average earnings).

Guess?, Inc. (NYSE:GES): This trendy Los Angeles-based clothing and accessories maker's shares have fallen about 9.5% since April 1. But its fundamentals remain strong. The strategy I base on the writings of mutual fund legend Peter Lynch considers it a "fast-grower" -- Lynch's favorite type of investment -- thanks to its impressive 39.3% long-term earnings per share growth rate. (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate.) Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide Guess' 10.7 P/E ratio by its long-term growth rate, we get a P/E/G of just 0.27. That falls into this model's best-case category (below 0.5).

Domtar Corp. (NYSE:UFS): Most of this Montreal-based firm's business involves the paper and pulp industry, and it is the largest integrated marketer of uncoated freesheet paper in North America It also owns a network of strategically located paper and printing supplies distribution facilities and makes incontinence care products marketed under the Attends brand name. Domtar has been hit hard in the past few months, with its shares falling about 20%. But it gets high marks from my Kenneth Fisher-based model. In his 1984 classic Super Stocks. Fisher pioneered the use of the price/sales ratio (NYSEARCA:PSR) as a valuation metric, finding it to be a better indicator than the more popular price/earnings ratio. This model looks for cyclical and industrial-type firms to have PSRs below 0.8, and Domtar's is a solid 0.59. The model also likes the company's reasonable 32% debt/equity ratio, $17.16 in free cash per share, and three-year average net profit margins of 7.5%.

Disclosure: I am long UFS, MOS, GES.