5 Stocks to Buy on a Downturn and How to Do It

NEW YORK ( TheStreet) -- I got several emails from readers and Options Investing Newsletter subscribers expressing concern over today's market swoon.

While I never like to make light of another person's anxiety, I find it hard to understand why these pullbacks scare anybody who has followed the stock market for more than a couple of years. From a technical standpoint, this type of weakness is normal and healthy. In fact, I am surprised and even a bit dismayed that the bearishness has not come harder and faster or lasted for longer stretches. Heck, if you only lived through last July, August and September, what we saw Thursday was nothing.

Pullbacks where the bears never really take charge disappoint me because I am a long-term investor. I like to buy stocks of strong companies. I look for candidates that do one of two things: lead the market in the rallies that inevitably follow one- to multiple-day declines; or persist to the upside during episodes of carnage.

Here I consider ways to get long five stocks that meet one of those criteria on today's market burp.

Lululemon ( LULU). With few exceptions, there might not be a company (and stock) I am more excited about.

I have written a bit about Lululemon here -- it's one of the few high-flying momentum stocks with a business model I can get behind solidly. It's also one of the few I am willing to play into earnings. I expect Lululemon to blow the doors off of the quarter when it reports in early June. If it doesn't, I will take advantage of any dips.

As the market tanked moderately today, Lululemon ran hard. She traded as high as $81.09, retreated back below the key $80 marker, but recovered and closed the session at $80.30. That close above $80 is key. For the week, Lululemon is up 7.9%.

I fully expect the stock to be the next member of the $100 club already populated by the likes of Chipotle Mexican Grill ( CMG) and Panera Bread ( PNRA).

Even though I own several Lululemon call options, it's one of those stocks I might quit using options on (with the exception of covered calls) and just go long directly. It's a long-term play. Lululemon is not going anywhere anytime soon; therefore, I see no reason to buy via a strategy with an expiration date.

Speaking of Chipotle, it dropped as low as $413.37 today, finishing the day off just under 2%. Like Lululemon, Chipotle is not a hollow momo stock like Netflix ( NFLX) was. Chipotle also has a future, steeped in new products (via the forthcoming, long-term ShopHouse Southeast Asian Kitchen plans) and slow but steady international expansion.

Unlike fast-growth companies that die a premature death (such as Netflix and one we all remember -- Webvan!), Lululemon and Chipotle will expand their reach, but at a prudent pace.

I want to get long CMG, the same way I want to get long three other stocks that suffered, even if only slightly, with the rest of the market today: Apple ( AAPL), Amazon.com ( AMZN) and Ralph Lauren ( RL). And that's by selling cash-secured put options.

If you have money sitting in your account to buy these stocks, why pay your broker for a limit order when you can sell a put, collect considerable income and quite possibly get yourself long the underlying stock that way?

We'll use Apple as an example. If you think there's more weakness on the horizon, you can sell a slightly out-of-the-money put. Heading into today's close, the Apple May $575 put would bring in about $9.65 ($965) in premium income. If Apple closes below $575 before or at expiration, you could be the buyer of 100 shares of the stock for every put you sold at that $575 strike price. Odds are you will not get put shares before expiration, but if the option is in-the-money at expiration, you almost definitely will. Because of the $9.65 in premium income you took in, your effective purchase price of Apple becomes $565.35. Not too shabby.

If you do not expect more, or much more, weakness, you can get aggressive and write an in- or at-the-money put. This strategy will increase the premium income you collect, but could turn out to be a bad decision, at least temporarily, if AAPL falls further.

As always, use my thoughts as starting points for your own research. Review the long-term charts -- Apple, Amazon, Chipotle and Ralph Lauren tend to pull back from time to time, but when a rally happens, they also serve as the strong stocks leading out in front.

>>To see these stocks in action, visit the 5 Stocks to Buy on a Downturn portfolio on Stockpickr.

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