Market timing is a well-known no-no in investing. But when prices dip, it’s an opportunity to buy, so it helps to be prepared. That’s when a wish list of stocks you want to own comes in handy. Having a stock list at the ready can help you in other ways, too. At a minimum, the list may deter you from making aimless impulse buys because it keeps your eye trained on companies you’ve vetted as worthy investments. And it can bolster your courage during a market decline, when fear tends to kicks in.
It may even help you keep a discerning eye on the rest of your portfolio. “Even if you’re 100% invested,” says Thomas Martin, senior portfolio manager at Globalt Investments, “you have to have a list of stocks that you would buy if something in your portfolio has a problem and you end up not liking it anymore.”
That’s one way the portfolio managers at Argent Capital Management use what they call their bench, a list of their favorite stocks — one in each sector — that they don’t own, says portfolio manager Jed Ellerbroek.
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Argent’s large-company exchange-traded fund, Argent Large Cap (ABIG), currently owns shares in four healthcare firms. But “if we like the bench stock more than one we own, we’ll swap it in. We want to own the highest-conviction stocks, the ones we believe in the most,” says Ellerbroek.
Building a shopping list of stocks can take some work. “It’s about doing your homework and looking at the fundamentals of a company,” says Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute.
Keep in mind that a shopping list should be part of a broad investing plan that’s aligned with your time horizon and your tolerance for risk. And aim to identify stocks of interest ahead of potential downturns, because declines tend to start and end quickly. We’ll walk you through some of the steps you should consider as you craft your shopping list.
The best prospects for your shopping list are high-quality companies that miss out on making it into your portfolio; they meet your criteria on nearly every measure but slip on one or two. Maybe it’s a market darling that’s too expensive. Or perhaps it’s a company that trades at a decent valuation, but one or two corporate events have you worried — a new chief executive has arrived, or the firm has just made a sizable new acquisition.
It’s worthwhile, then, to review the qualities that make a good stock. This requires a good understanding of what the company does. What’s its business? What end market does it serve? What problems is it solving for customers? What kind of growth rates does the business have? And where does the company stand in its peer group?
At Argent Capital, an ideal company has to meet three fundamental measures. First, the business must have a competitive advantage over peers. “Capitalism is a full-contact sport,” says Ellerbroek, “so what about this business keeps its competition at bay?” Second, the company must allocate capital wisely and act in the best interests of shareholders. “The question to answer is, What does the company do with its profits?” he says. The third measure is good long-term growth prospects.
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Amazon.com ticks all these boxes to Argent’s satisfaction, and it’s a portfolio holding. Amazon dominates the U.S. e-commerce market. It has been deploying cash — and issuing debt — to build data centers to power artificial intelligence, a long-term move that Ellerbroek believes is in shareholders’ best interests. And the company’s long-term driver is the steady one percentage point annual growth of e-commerce activity in the overall retail market.
Companies of interest that don’t pass all three tests land on Argent’s bench. For example, Netflix’s outsized bid for a Warner Bros. division earlier this year (which failed) was “higher than I was comfortable with,” says Ellerbroek, and it would have added debt to the company’s balance sheet. “I’m nervous about its capital-allocation priorities. We’re in wait-and-see mode,” he says. Insurer Arthur J. Gallagher is on the bench largely because of uncertainty about whether its cybersecurity insurance business can withstand disruption from AI. Understanding why the stock is on your “buy” list — and not in your portfolio — can make monitoring that stock easier.
The ultimate test in determining whether a stock moves from watch list to Argent portfolio is its valuation. One such measure is how the stock’s current price-earnings ratio compares with its industry and sector peers.
For instance, the managers for now deem shares in otherwise-attractive Intuitive Surgical, a medical device company, too expensive, says Ellerbroek. Though Intuitive shares have declined in recent months, the stock still trades at double the P/E of its peers on year-ahead estimates. “We hope the stock will continue to come down,” says Ellerbroek. “We have a price target, and if it hits it, we’re ready to buy.”
Don’t jump the gun on stock buys
Once prices shift down, do a quick review of why the stock has moved lower before snapping up shares. You want to make sure the drop isn’t because of a fundamental problem with the company or industry before you buy. “Stock prices tend to come down for a reason — there are usually some questions about the company’s business that have come up,” Globalt’s Martin says.
Semiconductor stocks have tumbled recently over concerns that there could be a slowdown in orders. “There’s a realistic fear that’s hit those names and caused them to fall in price. But if some of those are stocks you want to own for the long term, it may be a buying opportunity,” WFII’s McMillion says.
(Image credit: Getty Images)
Chip company Micron Technology, for instance, posted blowout results in late June, capping a better than 800% rise in the stock over the same period a year ago. But over the next few weeks, shares sank from more than $1,200 a share to roughly $850. Part of the problem was its stratospheric rise: Short-term traders were taking profits. “They’re not investing based on long-term fundamentals,” says Martin. Meanwhile, in mid July, analysts significantly hiked their earnings estimates for the current year and for 2027. Martin views the dip as a buying opportunity.
The pullback in the software industry — over fears that AI will shrink the business — is more of a minefield. “Some software companies may be disrupted by AI. In that case, you might not want those firms on your shopping list,” says McMillion. But some software companies have other business lines that can continue to grow, such as Microsoft with its cloud computing unit, and those discounted shares might be an opportunity, too. It’s important to assess each software company individually, says McMillion, to determine AI’s overall impact on its business.
Some price dips move in step with disappointing corporate moves. Red flags that might keep a company off your shopping list include trimming its guidance on future earnings growth, cutting its dividend, issuing more stock or debt, or curtailing a share-buyback program. These moves can be a drag on a stock, and investors should take them as a signal to, at the very least, look more closely at the business to find out what and whether anything fundamental has changed.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
