Why I think now is the time to buy back into the stock market

I think we may have seen the worse of the market sell-off that pushed the ASX into “correction” territory with losses of over 10%.

The S&P/ASX 200 (Index:^AXJO) (ASX: XJO) hit a low of 5,664 on October 25 after hitting a peak of 6,352 at the end of August.

The index has since made a tentative bounce and I think we may have seen the bottom of this market cycle.

If I am right, this is the time to be buying back into the market (if you haven’t been already). I’ve been buying a select group of beaten down stocks over the past few weeks – moving from a cash position of 20% in early September to around 5% currently.

One reason I think the market will continue to stay above its late October lows is the US mid-term election.

Experts point out that US equities have historically rallied after the mid-terms – and this is no matter who wins.

It’s the removal of uncertainty that is more important and a Democrat or Republican win is much of muchness.

If history repeats, a rebound in the US market will trigger a rally on our share market as we head towards the end of the calendar year when another seasonal rally takes hold – the Santa Rally.

Markets never move in a straight line, but I believe the ASX 200 will be materially higher over the next three months from where it is today and here are some of the stocks that I’ve been buying recently:

Magellan Financial Group Ltd (ASX: MFG): If there’s one stock leveraged to rising US equity markets, it’s this well-regarded global fund manager. The stock is looking inexpensive after Magellan’s share price took a dive in October as the S&P 500 got hammered. While the stock has pared its losses in the past week and a half, Magellan is still looking cheap in my view.

BlueScope Steel Limited (ASX: BSL): Forget “correction” territory! The BlueScope share price has collapsed into a “bear market” with the stock shedding nearly a quarter of its value since the August reporting season. Fears of a housing construction slowdown in the US and Australia, along with narrowing price premiums for steel in the US versus the rest of the world, have kept this stock in the sin bin. But these fears are overblown and the stock is looking ridiculously cheap when compared to its historical valuation.

Fortescue Metals Group Limited (ASX: FMG): This is another beaten down dog of the ASX. I have always avoided the stock due to the lower quality nature of its ore and balance sheet when compared to its larger rivals like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), but everything has got a price. Fortescue’s share price has fallen too hard (it’s down over 20% this year) and the narrowing discount that China is paying for its inferior ore versus the better quality stuff makes me think this is the time to be jumping on this underperformer.

Macquarie Group Ltd (ASX: MQG): I had taken profit on most of my holdings in the investment bank at the end of August on worries that the overall market would retreat. Macquarie is a “high beta” stock, which means it moves more when the market is falling (or rising). I’ve bought back big into the stock a few weeks ago and its latest result and profit upgrade is adding to my confidence that the stock will outperform during the Santa Rally. It also helps that the stock is cheap after the recent sell-off.

Reliance Worldwide Corporation Ltd (ASX: RWC): The Reliance Worldwide share price has suffered on worries about falling US home construction data but I don’t think the 18% drop since late August is justified. Its products aren’t used in new building construction but to repair leaking pipes. Reliance is also a great stock to own if you like to gain leverage to the strengthening US dollar.

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Motley Fool contributor Brendon Lau owns shares of BlueScope Steel Limited, Fortescue Metals Group Limited, Macquarie Group Limited, Magellan Financial Group, and Reliance Worldwide Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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