Treasure amid the Market’s Shipwreck

American factory orders came in higher than expected in July. The dollar saw gains against the euro for its 10th straight session. Crude oil and commodities continued their decline to multi-month lows. It’s not hard to see why some investors are seeing sunny skies ahead.

Time for a Turnaround

Those who are old enough should not be that surprised either – stagflation is not a new phenomenon. The financial media, perpetually predicting a doomsday, has the public obsessively focused on the “housing meltdown”, “credit crisis”, and “soaring commodities”.

Now, I’m not saying that investors should ignore the financial media, because they do have some valid points. Agricultural stocks like Potash Corporation (POT) and Monsanto (MON) have racked up gains while companies like Home Depot (HD) and Target (TGT) have racked up losses.

Investor and consumer sentiment are now at all-time lows – but so are stock prices. American icons like Warren Buffett and Bill Miller may be sitting on heavy losses, but they are digging deep into their wallets to buy more stock. So should you.

After all, it was the best investor of all time that said “be fearful when others are greedy and be greedy when others are fearful.” Now is the time to be greedy…

Finding Treasure among Trash

Profitable, growth-orientated companies trading at steep discounts to their intrinsic value are the underpinnings of a quality stock portfolio. Lucky for you, there are many such opportunities in today’s market.

Retailers like Target (TGT) and Sears (SHLD) have already staged impressive turnarounds, but still trade well below their 52-week highs. Meanwhile, large technology names like eBay (EBAY) and Cisco Systems (CSCO) are also available on the cheap.

Not everything is on sale, however. Some stocks deserve to be cheap. Financials and real estate investment trusts, among others, should probably be avoided until the market paints a clearer picture of where they are headed.

Another one of my favorite Warren Buffett quotes is: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Don’t take risks on stocks just because they are cheap – make sure they are well-known, quality companies.

The Best Way to Cash in

Investing in a turnaround is risky, but can pay off handsomely. One way to tilt odds in your favor is to diversify your holdings and use leverage to increase your upside. Unfortunately, diversifying requires a lot of capital and leverage works in two directions.

Luckily, there is a solution. Investors looking to multiple their upside while reducing their downside may want to consider long-term equity anticipation securities (or LEAPS). These long-term options allow investors to focus on a long-term timeframe while realizing the advantages of options.

LEAPS options can give investors the right to purchase shares at a fraction of the cost of purchasing the underlying shares. This means investors have more money to diversify, less money at stake per stock, and more leverage – a win, win, win situation.

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