With Stock Markets at Record Highs, Is There Still a Smart Way to Buy?

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The Dow Jones Industrials (^DJI) and the S&P 500 (^GSPC) have both climbed to new record levels recently, producing gains of almost 20 percent so far in 2013 as of July 18. Yet given how far stocks have come since the market's meltdown in 2009 -- the S&P 500 has risen more than 150 percent since then -- some investors worry that buying stocks now is bound to turn out badly.

Before you swear off stock investing entirely, you should realize that not all stocks have equal prospects. Even with the market trading at highs, some stocks haven't seen the same gains as the Dow and S&P. Moreover, even some stocks that are at or near their own record levels have the fundamental business strength to justify their share prices.

Let's take a look at these two categories with some tips on how to find good stocks even with markets at record highs.

Strategy 1: Focus On Beaten-Down Industries.

Bull markets rarely take every stock higher. Inevitably, you'll find some companies or industries that suffer setbacks and end up being big laggards. If the conditions that created those setbacks reverse themselves, though, then beaten-down stocks can catch up with market gains quickly.

We've already seen that phenomenon with homebuilders' stocks. From 2009 to 2012, even as the rest of the economy started picking up steam, homebuilders performed badly as the housing market kept failing to post lasting home-price gains. In 2012, though, housing finally started showing considerable gains, with home prices rising double-digit percentages in the past year.

One possible place to look for a turnaround today is in commodity stocks.

A weak global economy has reduced demand for industrial metals like aluminum and copper, sending prices plunging and hurting producers like Alcoa (AA) and firms that that mine and refine those metals like Freeport-McMoRan Copper & Gold (FCX). Also, with fears of inflation and economic instability having significantly abated, gold and silver have seen dramatic price declines, and precious-metals mining stocks like Goldcorp (GG) and Barrick Gold (ABX) have fallen sharply as well. Those adverse conditions could last well into the future, but eventually, if the global economy starts to regain its strength, then commodity demand should rise and pull commodity-related stocks up.

Keep in mind, though, that turnarounds can take a long time to materialize. If you don't have the patience to wait for other investors to see the promise of a struggling industry, then this strategy could leave you frustrated for months or even years into the future.

Strategy 2: Seek Out High-Flying Values.

Just because a stock trades at all-time highs doesn't mean it's not a good value. If a company expects its sales and income to grow at a fast rate in the future, even richly priced shares don't always reflect the full value of the stock.

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As an example, look at fashion giant VF (VFC), which is the company behind popular brands that include Timberland, North Face, Vans, and Wrangler and Lee jeans. The stock has soared by more than 30 percent this year to all-time highs, but its earnings have more than kept pace. With expected double-digit percentage earnings growth over the next several years and the ability to capitalize on the rapidly expanding sports and fitness market for athletic apparel, VF has plenty of room for further gains given its relatively modest earnings multiple in the mid to upper teens.

One thing to remember about high-flying stocks is that they often incorporate very optimistic expectations, and so even the slightest misstep from a company can send its stock plunging. Nevertheless, by choosing high-growth stocks that trade at reasonable valuations, you'll reduce that risk somewhat while earning better gains if things work out well for the company.

Don't Stop Buying; Just Buy Smarter

Regular investing is an essential element of ensuring your long-term financial success, and even with stocks at record highs, you shouldn't give up on your regular investing plan entirely. However, by focusing on stocks that have a better chance of posting further gains from their current levels, you can reduce the risk level in your investment portfolio while still remaining on course to benefit from the long-term potential that the stock market offers.

Motley Fool contributor Dan Caplinger owns shares of Freeport-McMoRan Copper & Gold. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold.

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