Stock Selloff 'Great' for Bets on Banks, Tech

BOSTON (TheStreet) -- Jeanie Wyatt, head of $2 billion investment firm South Texas Money Management, says yesterday's dive in the Dow and S&P 500 was "great, quite frankly."

As stock prices continued their worst slump since 2008 and Treasury yields collapsed, Wyatt says she's considering buying banks such as Wells Fargo ( WFC) and technology companies like EMC Corp. ( EMC).

"This correction was so broad that it has created some great opportunities," says Wyatt, whose firm oversees separately managed accounts for individual investors in San Antonio. "You could have a field day buying a lot of things. The stock market will be a much better place to find yield, so with the selloff, you can now easily find yields that exceed the U.S. Treasury."

Wyatt says she has been expecting economic softness. She argues that now is the time to capitalize on the fact that most investors are stuck looking in the rearview mirror rather than seeing what's ahead.

"We're having a growth scare. But we've been saying all along that the Japanese tsunami and the high prices at the gas pumps were really going to be very hard on the economy in the second quarter," she says. "Now we're getting those reports, but people are missing the point."

Wyatt says her clients didn't panic either, saying they are smarter having survived the market crash in 2008 and early 2009. "They know that being reactive is the worst thing to do. The selloff was so broad that it was clearly a capitulation," she says. Following the better-than-expected July jobs data today, U.S. stock-market indices are seesawing.

South Texas Money Management quantitatively looks at over 30,000 stocks, but the firm's investor portfolios are each balanced with about 50 to 60 companies that hedge between value and growth. "We have names like Netflix ( NFLX) alongside really out of favor stocks like Sony ( SNE)," Wyatt says.

As she prefers to stay fully invested and devotes a lot of time to focusing on sector selection, Wyatt says tremendous opportunities can be had now in financial stocks and tech names, many of which have vastly underperformed the broader market this year. In contrast, she has been de-emphasizing her focus on energy and cyclical stocks in the past few months, noting that her firm has sold out of holdings like Southwest Airlines ( LUV).

One place where Wyatt has been underweight is bank stocks. She says she's avoided them for so long that now she's looking at the sector. Wyatt is turning to credit default swap (CDS) spreads as a barometer for bank stocks. CDS spreads are the difference between the so-called risk-free interest rate and the rate banks pay in the market for five-year loans. The higher the spread, the bigger the premium a bank is paying, which indicates the market believes the bank's debt is riskier.

"The bank CDS spreads are what we look at closely as a good measurement of risk," Wyatt says. "U.S. banks CDS spreads, unlike European banks, are not blowing out. In fact, they've improved a great deal since 2009."

Wyatt hasn't snatched up any bank stocks yet, but she says she's avoiding Bank of America ( BAC) and Morgan Stanley ( MS) for now due to high CDS spreads.

On the other hand, she's looking to pick up banks like JPMorgan Chase ( JPM) and Wells Fargo as well as smaller investment banks like Raymond James ( RJF) and Piper Jaffray ( PJC).

In addition to the financials, Wyatt is focusing on technology. She notes that the sector hasn't seen many strong performers in 2011 and yet the valuations are very attractive. Another reason she's turning to technology names is due to the belief they will benefit most from strong capital spending leading up to the end of the year. She cites a bill passed in Washington last year that allows companies that invest in themselves to write off 100% of that investment.

"That really favors technology stocks," Wyatt says, noting that tech companies have big research and development (R&D) outlays. She is primarily looking to buy EMC and SAP ( SAP), but Wyatt argues investors "could even buy a technology ETF at these levels and it would be a good trade."

Outside of technology and financials, Wyatt says investors should stay diversified and focused on individual stock valuations and yield. As low as interest rates are, stocks are the best place to pick up yield, she says. "Small-cap stocks have also been underperforming, so we think it's a great opportunity to buy those names," she adds.

Wyatt says now is the time for investors to act, since she's seeing almost a mirror image of last year's market.

"Markets don't repeat themselves very often, but what we're seeing now is a déjà vu of last year," she ways. "Last year, it was the same thing in the spring and early summer. We had a growth scare on soft economic numbers and we had talk of going back into a recession. We contended then as now that there is no indication that this will be a recessionary year. We're going to have a strong market after this capitulation."

-- Written by Robert Holmes in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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