Analysis: As U.S. stock market zigzags, some investors pounce

NEW YORK (Reuters) - Just five weeks after the Standard & Poor's 500 Index ended 2013 with a nearly 30 percent gain, fund managers are getting reacquainted with loss.

A combination of profit-taking, concerns about growth in emerging markets and the Federal Reserve's decision to keep trimming its monthly bond-buying stimulus has sent the benchmark S&P 500 <.SPX> down 4 percent since the end of 2013. As a result, only one out of the 1,781 large-cap growth funds tracked by Morningstar has a positive return for the year through February 5, and that one - the tiny $10.2 million Upright Growth Fund - is up just 1.1 percent.

Yet those widespread losses are spurring some portfolio managers who had been fearful of the market's lofty prices to do something else they haven't done for a while: Buy stocks.

"We've had about 20 percent cash in our portfolios, thanks to inflows, and now we're finally getting a chance to put it to work," said Craig Hodges, a portfolio manager at Dallas-based Hodges Capital, who manages about $1 billion in assets. He expects to end the year with his cash position fully invested in stocks.

Hodges is not alone.

Thanks in part to the stock market's rally and falling bond prices in 2013, investors moved $194.4 billion into equity funds - the largest net inflow in more than 21 years, according to Lipper, a Thomson Reuters company. Now that the S&P 500 has marked its first 5 percent slide from its previous closing high since June, fund managers are taking advantage of falling prices by adding stocks to their portfolios that they say look unfairly beaten up by the market's swoon. Among their favorites: those companies that look to be oversold because of their exposure to emerging markets, and those that are increasing market share in the United States.

Hodges, for instance, recently added to his position in exchange-traded fund company WisdomTree Investments Inc . The company's stock had dropped 19.5 percent through Wednesday's close for the year to date, in large part due to the slide in emerging markets that affected its popular exchange-traded funds. Yet Hodges likes WisdomTree because he sees it as taking advantage of a shift in investor behavior.

"With money leaving the bond market and into equities, a lot of that is going to go into ETFs, and WisdomTree will get a lot of those dollars," he said.

BANKING ON A TURNAROUND

Whether the market turns around quickly enough to make these bets seem prescient is an open question, of course. The S&P 500 jumped 1.24 percent on Thursday - its biggest daily percentage gain of the year so far - after applications for U.S. unemployment insurance fell more than economists expected. Yet the Federal Reserve's continued paring of its monthly stimulus and high stock prices after last year's gains may cap any potential rallies this year, analysts say.

Despite the risks, other fund managers are picking up the stocks of companies that have been hit by the slide in emerging markets, which took the benchmark MSCI Emerging Markets index <.MSCIEF> down 8.8 percent for the year through February 5.

Connor Browne, a portfolio manager of the $1 billion Thornburg Value Fund , whose 26 percent gain over the past 52 weeks puts it in the top 3 percent of large-cap growth funds, is looking for consumer companies whose emerging markets exposure is dragging them down.

Among his recent moves: adding to his position in Tupperware Brands Corp. , whose stock had declined 19.7 percent for the year to date through Wednesday's close. Tupperware, whose popularity in the United States surged in the 1950s, gets about 65 percent of its revenues from emerging markets countries, Browne said.

"The emerging markets are decades behind the U.S. in terms of retail infrastructure, and there's a real need and value for the Tupperware product and its direct sales model," he said.

While the steep currency drops in Argentina and other emerging markets have recently weighed on the company's shares, Browne estimated that its large and growing business in Mexico and Indonesia will lift its stock price over the next 12 to 18 months.

Chris Guinther, who manages two RidgeWorth funds that total approximately $600 million in assets, said he wouldn't be surprised if the S&P 500 fell to 1,700, a drop of 4 percent from its current level of about 1,770. Yet he predicted that the improving job market in the United States should push the stock market to record highs by the end of the year.

He's been using the market's declines to add to his position in "disruptive" companies - Google Inc , Facebook Inc , athletic brand Under Armour Inc and luxury retail brand Michael Kors Holdings Ltd - that are taking market share away from competitors. Those companies all get the majority of their revenues in the United States, he said.

Michael Kors, for instance, climbed 12.5 percent for the year to date through Wednesday's close - a day after the fashion designer's namesake company reported quarterly results that beat analysts' estimates. The company, known for its handbags and accessories, reported that traffic at its stores was up by double-digits, while its sales in Europe increased 144 percent compared with the same quarter last year.

"This company has completely taken over the fashion leadership from Coach," said Guinther, who added that he expects it to remain at the front of the fashion cycle for the next three to five years.

If the stock market resumes its slide, Guinther said he expects to buy more.

"The competitive advantages that these companies have doesn't change if the market falls 5 percent or 10 percent," he said.

(Reporting by David Randall; Editing by Linda Stern and Jan Paschal)

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