In stock market meltdowns like this one, look to buy 'babies that get tossed out with the bathwater,' Oppenheimer says
- The stock market has gotten hit hard over the final few months of the year.
- The forward price-to-earnings ratios in every sector, except for utilities, have fallen below their five-year averages.
- Now is the time to look for opportunities in the market, Oppenheimer says.
The selling that has engulfed the US equity markets over the final months of the year is producing the opportunity to buy stocks at "attractive valuations," according to one Wall Street firm.
"We reiterate our call for investors to watch for 'babies that get tossed out with the bathwater,'" John Stoltzfus, Oppenheimer's chief investment strategist, wrote in a note sent out to clients on Monday."Times of market turbulence can cause investors to focus so much on downside risk that they miss opportunities befitting of the old adage to 'buy low, sell high.'"
After topping out in late September, both the S&P 500 and Dow Jones Industrial Average have fallen by about 18% and the tech-heavy Nasdaq has shed more than 21%, entering a bear market, as the prospect of more Fed rate hikes and the trade spat between the US and China rattled investor confidence.
That sell-off has taken a hammer to forward price-to-earnings ratios. According to Stoltzfus, every sector in the S&P 500 has seen its valuation fall below its five-year average, except for utilities.
"We believe investors should view this as an opportunity to gain equity exposure at attractive valuations to market segments that appear oversold," Stoltzfus said.
He's not the only one on Wall Street to suggest it may be time for investors to start dipping their toes into the market.
Last week, Alliance Bernstein wrote that the prior week saw a net outflow of $39 billion from equity funds - mostly from the US - making for "the largest weekly outflow in dollar terms in the history of our weekly dataset (going back 18 years)." The firm said that pushed its sentiment indicators into "buy" territory.Additionally, Tom Lee, managing partner at Fundstrat Global Advisors, noted that sentiment "reached an extreme bearish level that historically is a major contrarian buy signal."
Still, just because stocks are cheap, doesn't mean they mean they can't get even cheaper. And that is what appears to be happening on Monday, with the major averages down more than 1%.