The Market Sell-Off: What to Buy Now

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As the market went crazy over the past couple of weeks, we Fools have been chatting. No, I didn't say "gossiping," and we haven't been spending more time by the water cooler. We've been chatting with you -- our readers, subscribers, and fellow Fools.

During the numerous chats that we've hosted on the Fool.com website, one of the questions that's come up most often is what investors -- particularly new investors -- should be buying in this wild environment. The good news is that whether we're immersed in insane volatility or lull-inducing calm, the bottom line stays largely the same.

Four rules
If you're a new investor -- or a veteran interested in getting back to the basics -- these four guidelines are essential to getting started on the right foot.

1.Stick to the known. There will be plenty of time later on for learning about new industries. For now, stick to businesses and industries that you are already very familiar with. Are you a doctor by day? Consider pharma stocks like Pfizer (NYS: PFE) or medical equipment stocks like Stryker . Do you do most of the household shopping? How about Procter & Gamble (NYS: PG) or Kellogg?

2.Easy does it. Learning the ins and outs of companies' financial statements doesn't happen overnight and so you shouldn't expect that you can take on the most complex accounting right away. After all, if you'd never boiled an egg before you wouldn't assume you could whip up a perfect souffle, would you? Look for companies that have relatively clean statements, are free of recurring write-offs, strange tax situations, noncash financing charges, and the like.

3.Price matters. As with the accounting, understanding stock valuations and what constitutes an attractive valuation is a learning process. The basic idea is that based on factors like growth and profitability, a given stock/company is worth some theoretical amount -- that's the stock's value. Our goal as investors is to pay a price that's below that value. Finding stocks that sell below their value is challenging, but that doesn't mean you should ignore it, even at the start.

4.Keep a record. A big part of any learning process is looking back and improving your performance based on past successes and -- more importantly -- mistakes. But you can't look back on anything easily if you don't keep records. When you buy a stock, take a few moments to write down why you're buying it, what your expectations for the stock/company are, and anything else that has gone into your decision-making process. With that at your fingertips, you can easily look back later to see where you were on point and where you slipped up.

Ideas for a head start
With thousands of stocks at our fingertips, there's plenty to explore. That can also be a bit overwhelming though, so, with that in mind, here are five ideas that I believe fit points two and three above (I can't answer No. 1 for you and No. 4 isn't a qualifier).

Company

Business

Forward Price-to-Earnings Ratio

Expected Growth Rate

PEG Ratio

Apple (NAS: AAPL) Consumer electronics12.223.1%0.53
The Home Depot (NYS: HD) Home improvement retail12.913.0%0.99
Union Pacific (NYS: UNP) Railroad operator12.916.7%0.77
FedEx (NYS: FDX) Air freight and logistics12.113.5%0.89
Kohl's (NYS: KSS) Department store9.912.7%0.78

Source: Capital IQ, a Standard & Poor's company.

So what's so special about these particular companies? First of all, most readers are probably familiar with the business of at least one of the companies on the list. Additionally, each of the companies above has a relatively straightforward business model and easy-to-grasp financial statements. Finally, all of the stocks of these companies are cheap on the basis of the PEG ratio, which is a quick, simple (but by no means foolproof!) measure of valuation.

All of the stocks above could see more downside if the U.S. does tip back into recession. As strong as Apple's market position is, it still needs customers who are willing to spend on fancy gadgets. Retailers like Home Depot and Kohl's are similarly in need of shoppers that don't have padlocked wallets. And when economic activity slows down, there is less demand to transport goods from one place to another, which is a turn that would hurt both Union Pacific and FedEx.

However, as far as finding quality companies that new(er) investors can easily understand and are selling at reasonable prices, I think you could do a lot worse than the five above.

Of course, it's always good practice to look before you leap when choosing an investment, so before pulling the trigger on any of these stocks, you can add them to your watchlist by clicking the " " next to the respective tickers. Don't have a watchlist yet? Click here to start one for free.

At the time this article was published The Motley Fool owns shares of FedEx and Apple.Motley Fool newsletter serviceshave recommended buying shares of Kellogg, The Home Depot, Pfizer, Procter & Gamble, FedEx, Stryker, and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.Fool contributorMatt Koppenhefferdoes not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting hisCAPS portfolio, or you can follow Matt on Twitter@KoppTheFoolorFacebook. The Fool'sdisclosure policyprefers dividends over a sharp stick in the eye.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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