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Are we in for a correction?

Could be. And if you think we're headed for a replay of the late March-early June or early September-through-mid-November pullbacks of 2012, what should you be doing about it?

Raising a little cash seems a reasonable idea, of course. Although since we're talking declines of 10% or less here (in my estimation), I don't think it makes sense to sell everything.

But you should also devote some "correction preparation" time into putting together a list of stocks you'd most like to buy if we do indeed get a reasonable correction. In the current state of the financial markets, corrections relatively frequent events, and they don't necessarily last very long, so you need to be ready.

Remember, we're dealing with extraordinarily volatile markets here. The pullback from March 29 to June 4, 2012, quickly turned into a rally, which itself took the Standard & Poor's 500 Index ($INX) up 14.8%, before it peaked on Sept. 14. If you're dithering over what to buy on a sell-off, you could miss some of the best bargains.

That's why for today's post I've put together a list of 10 stocks to buy on a correction.

Get ready, get set

Technically a correction is a drop of 10% or more. There's a good chance we're looking at something less dramatic than that -- say, a 7% pullback. In fact, I've compiled the list not because I believe a correction is guaranteed but because, these days, I think it's smart to be prepared for volatility.

Jim Jubak

Jim Jubak

 I've grouped the stocks in this list into rough categories that correspond to how deep any pullback might be. Some are better buys in a shallow retreat. Others won't become bargains unless the U.S. market takes a sizable dive. I think the news flow will have a significant say over whether we correct or not in the next month -- and how big that correction might be -- and predicting the news is never easy.

I want to be prepared for whichever way the wind blows.  

U.S. stocks have stalled -- not in a big way, but stalled nonetheless. The Standard & Poor's 500 peaked at 1,531 on Feb. 19 and has moved slightly lower since, closing at 1,516 on Feb. 22. And so have markets in Japan, China and Europe. Maybe this is all just the normal pause after a huge rally that has taken the indexes near all-time highs in the United States.

But growth in the U.S. economy is threatened by the effects, first, of the January tax increases that were part of the deal to avoid the fiscal cliff and, second, of the sequester set to wipe billions out of government spending at all levels starting March 1. Eurozone economies look to be either in recession (Spain) or headed that way (France). Japan and the United Kingdom seem about to embark on an additional experiment in central bank action -- quantitative easing -- that's a tribute to the depth of problems in those economies rather than a vote of confidence in this monetary policy.

Could we have a correction here? Sure, although I certainly wouldn't say one is guaranteed. Central banks continue to flood the markets with cash -- and since economic growth isn't vigorous in most of the developed world, a lot of that cash is headed not into investments in new plants and equipment but into financial assets.

But in recent years, it hasn't been smart to overlook the possibility of a decent correction after any rally. Even in 2012, which was a good year for stocks with the S&P 500 delivering a total return of almost 16%, investors saw a drop of 6.2% from Sept. 4 to a market bottom Nov. 13. In spring of last year, the S&P 500 fell by 9% from March 29 to June 4. And, my calendar tells me, spring 2013 is the season up next.

With indexes in the U.S. near five-year or all-time highs, I've turned cautious lately. I've thought it made sense not to sell everything -- since I don't know that we're guaranteed to see a correction soon -- but to sell stocks that hit my target prices. So I sold Nestlé (NSRGY) on Feb. 6 and Cummins (CMI) on Feb. 11. I might have sold more, but I ended 2012 with a little more than 29% in cash. With that kind of cash position, I didn't need to be too aggressive about raising more cash. (And if you think that kind of precision about the Jubak's Picks cash position is a sign that I've just about finished my calculations for the portfolio's performance through the end of the year, you're absolutely right. I'm just double-checking some numbers now, and I expect to post that performance report this week.)

The buying I've done under these circumstances has been either on a dip in the individual stock -- Akamai Technologies (AKAM) -- or on strong trends outside the United States, like buying Toyota Motor (TM) to play a weak Japanese yen.

And now what? I'm watching and waiting and researching.

10 to buy on dips

I've divided my watching and researching into four categories:

● Stocks that I sold and I'd like to rebuy after a drop of 10% or so. In this group, I'd put recent sells Cummins, down 5.7% from my sell as of the close on Feb. 22, and Nestlé, down 1.5%.

● Stocks that I've been waiting to buy, but that have run up too far lately. In this group, I'd put Cheniere Energy (LNG), Marathon Petroleum (MPC) and eBay (EBAY). I'd look at this group, as well, if they dropped 10% or more.

● Stocks that never seem to get cheap. You're likely to get these only if the correction gets really serious -- more like 15% than 10%. I don't think we'll get there, but I don't want to let a correction like that go to waste if we get one. In this group, I'd put Middleby (MIDD), Precision Castparts (PCP) and Pioneer Natural Resources (PXD). And if I get these, I intend to paste a Post-it to my forehead saying, "Don't ever sell."

● Stocks that are more volatile than the general market and that are likely to get hit harder than the general market in a downturn. You can easily see the downside, since some of the stocks in this group have already taken a beating in the last couple of weeks. But look back to the earlier stages of this rally to remind yourself of the upside potential. For example, Yingli Green Energy (YGE) was up 171% from Nov. 23 through Feb. 12. But the shares of this Chinese solar company then fell 14.6% in a matter of the less than two weeks from Feb. 12 through the close on Feb. 22. (Yingli Green Energy is a member of my Jubak's Picks portfolio.) You've probably got your favorites in this group, but I'd like to suggest one that you may not have thought of: Australian coal miner Whitehaven Coal (WHITF), traded as WHC.AU in Sydney. The shares climbed 30.6% from Nov. 16 through Jan. 23 before retreating 17.9% from Jan. 23 to Feb. 21. At the Feb. 21 close in Sydney, shares were almost back to the level of Nov.16.

Those are my 10. You can also fill out these groups with picks of your own. It's not yet time to do any buying, mind you. Just time to get prepared for what the market might throw us.

Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

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At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this column. The fund owned shares of Cheniere Energy, eBay, Precision Castparts, and Whitehaven Coal as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Global Equity Fund website.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

Click here to find Jubak's most recent articles, blog posts and stock picks.

 

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