- US indexes are entering correction territory as a flurry of bad news rattles global markets.
- As fear spreads, many are running for the hills.
- However, savvy investors may view this as a chance to shed overvalued stocks and acquire high-value opportunities with significant upside potential.
- For less than $8 a month, InvestingPro's Fair Value toll helps you find which stocks to hold and which to dump at the click of a button.
Recessions and market corrections often happen in the same way: first slowly, then all at once.
While the jury may still be out on both, global traders were surprised to wake up this morning to a flurry of bad news, pushing Japan's Nikkei index to its biggest one-day crash in 40 years, while the Nasdaq traded 4% lower in the premarket at the time of writing.
Among the various catalysts converging simultaneously, a global carry trade unwind triggered by a rate hike from the Bank of Japan has joined growing fears of a US recession, sparked by Friday's sub-par jobs report.
If that wasn't enough, Warren Buffett's Berkshire Hathaway (NYSE:BRKa) disclosed that it sold massive amounts of stock in Q2, prompting trades to flee household names such as Apple (NASDAQ:AAPL) and Bank of America (NYSE:BAC), pushing the S&P 500 VIX Futures (know as the fear gauge) to a 41% jump during premarket.
Now - as the thriving 2024 market hits a pivotal point, the question that lies ahead is:
What to Do Now?
While the first, most-natural human reaction is to drop everything and run for the hills, savvy investors know that profits and emotions don't go hand in hand.
In fact, market corrections (and even market crashes) are normal and can —if you position yourself well—prove to be great long-term opportunities.
And how do you do that? Simple - By staying away from overvalued stocks, which present a high risk, and positioning your portfolio on high-value plays that still have room to grow.
It is only by knowing the true value of the stocks you own can you succeed in the long-term game.
That's where InvestingPro's flagship Fair Value tool can help you through both good and challenging times. By leveraging 17+ valuation models, it makes it easier for investors to assess the potential value of a stock without needing extensive financial expertise.
Alternatively, you can also turn to our new Stock Screener for a view on Recession Proof Stocks via this link.
Let's take a look at two stocks you should avoid right now, according to our Fair Value tool for a better understanding on how to leverage this tool right now.
1. Duke Energy at Risk of Reversing YTD Gains
Duke Energy (NYSE:DUK) has enjoyed a great first half of 2024 so far, registering gains of 17.39% since the start of the year.
This energy stock is currently trading at its 52-week highs and those who got in on the rally early might be wondering if the time is right to lock in profits.
This is where insightful tools like fair value can help investors make an informed decision.
Looking at the data, the tool currently signals a potential 22.7% downside.
Source: InvestingPro
A 22.7% downside essentially means the stock has the potential to wipe out all of its YTD gains.
Duke Energy is set to report earnings tomorrow, with EPS expected at $1.02 and revenue at $6.5B.
If the report comes in below expectations, the fair value tool may prove right once again, and the stock might experience a correction after a stretched-out bull run.
Some investors might hold on to the stock hoping for further gains, and those using the fair value tool's insights might consider booking profits on this overvalued stock soon.
2. Eli Lilly - Ripe for a 22.8% Correction?
Eli Lilly's (NYSE:LLY) stock has been on a roll so far this year, posting some tremendous gains of about 39% YTD.
But as the bulls run for the exits and market correction deepens, would it be wise to hold on to the stock that’s sitting on these amazing gains?
Well, we can look to smart tools like fair value for the answer.
Source: InvestingPro
Right now, the fair value tool signals that the stock is ripe for a correction, and at risk of losing more than half of its gains this year.
And we would also have to factor in the fact that the stock has seen a meteoric rise of about 345%+ since January 2021.
This makes the case for locking in profits on this stock even stronger.
Bottom Line: Other Stocks Vulnerable to a Selloff
As the market prepares for a major selloff today, investors should avoid panicking. After a great year-to-date performance, nothing could be more natural.
However, what you need to do is to re-evaluate the stocks you are holding in light of a higher-risk environment. That means understanding the actual financial data supporting these companies, particularly when compared to their current stock price.
Just as markets do not go up forever, neither do they drop forever once a correction kicks in. Use this to your advantage and find the right stocks to position yourself in the long run.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.