Don't Panic! Buy these Stocks on their Pullback

The recent pullback in stocks has many investors worried that the 2-year bull market rally is over.

Sure, there is plenty to be worried about. The sluggish 1.8% GDP growth in the first quarter is a bit disconcerting, and it doesn't look like the European sovereign debt crisis is going away anytime soon.

But there are many reasons why this recent pullback might just turn out to be an excellent buying opportunity. Here are the two biggest reasons:

• Earnings. It seems like the market has already forgotten just how strong first quarter earnings actually were. Sales growth was a solid 8.8%, margins continued to expand, and net income growth was a stellar 17.2%.

  Moreover, the earnings estimate revision ratio for the S&P came in at 1.89, which is a very bullish reading. In fact, the S&P 500 "earnings per share" is expected to hit a record $95.63 this year and $109.32 in 2012.

• Valuation. The S&P is trading at a very reasonable 14.0x 2011 earnings. Despite record forecasted earnings, the S&P is still about 16% below its all-time high in 2007.

Cyclicals Leading the Way Again

Some of the best performing sectors during the rally have suddenly become the worst performing during the recent pullback: industrials, basic materials and commodities. It should come as no surprise that these are also some of the most cyclical sectors.

But many of the companies within these sectors have recently delivered exceptionally strong earnings and have raised guidance for 2011. Although their stocks may have pulled back, consensus earnings estimates have been soaring. This potentially presents a great buying opportunity.

Assuming that we don't fall back into another recession (which still seems unlikely), these companies should continue to post impressive numbers. For those of you kicking yourselves for not getting into cyclicals last fall, now may be your chance.

Listed below are four cyclical stocks that look attractive after the recent pullback:

Caterpillar Inc. (CAT - Analyst Report) was the top performing Dow Jones Industrial Average component in 2010, but it has also been one of the weakest over the last few weeks, falling about 13% from its 52-week high.

Much of this pullback has to do with fears regarding sluggish economic growth in the U.S. and slowing growth in China as well as a stronger dollar.

But whatever the market is seeing, it certainly hasn't shown up in the company's operating performance yet. Caterpillar has posted 9 straight positive earnings surprises, and the momentum is only getting stronger. Last quarter, CAT delivered a 40% positive earnings surprise on much better than expected revenue.

In the April 29 first quarter press release, the company noted that "the outlook for 2011 has improved" and that it is "positive about the short-term U.S. economic outlook." The company significantly raised sales and earnings guidance, sending analysts' estimates surging higher.

Valuation is also very reasonable with shares trading at 14.9x 2011 earnings. It is a Zack #1 Rank (Strong Buy) stock.

Although the stock has pulled back, consensus earnings estimates continue to move higher. This can be seen in the company's Price & Consensus chart:

Titan International Inc. (TWI - Snapshot Report) has fallen 19% off its 52-week high in just the past three weeks.

Titan manufactures wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States.

Despite the recent pullback, CEO Maurice Taylor Jr. stated in a May 19 press release that "the agriculture segment remains strong and earthmoving and construction continues to improve." He went on to revise sales and EBITDA projections higher for 2011.

Analysts revised their estimates significantly higher after the company delivered better than expected Q1 results on April 27, sending the stock to a Zacks #1 Rank (Strong Buy) stock.

Although estimates jumped higher, the weak stock market has pulled shares of TWI down. Check out the recent divergence between the price and consensus estimates:

Timken Co. (TKR - Snapshot Report) is another industrial stock with record earnings but a falling stock price. It is off 17% from the 52-week high seen on April 27.

Timken Co. manufactures bearings, alloy steels, and related components and assemblies.

Back on April 26, Timken was trading around $55 a share and had just delivered record quarterly earnings. Management raised its revenue and earnings guidance, and analysts raised their estimates as well. But shortly thereafter, the market got soft and brought TKR down with it. It is now trading around $48 per share.

This could be a great entry point with shares trading at just 11.7x forward earnings, a significant discount to the industry average of 16.3x. Its PEG ratio is only 0.8.

Timken is a Zacks #1 Rank (Strong Buy) stock.

Cummins Inc. (CMI - Analyst Report) is down 14% from its 52-week high despite exceptionally strong first quarter earnings and growth forecasts.

The company delivered a 22% positive earnings surprise on April 26 driven by better than expected revenue. CEO Tim Solso stated in the first quarter press release that its "outstanding first quarter results demonstrate that we are well positioned to take advantage of our significant growth opportunities as markets around the world continue to recover."

The company went on to raise its guidance for 2011. Consensus estimates shot higher, with the 2011 Zacks Consensus Estimate jumping from $7.22 to $7.87.

It is a Zacks #1 Rank (Strong Buy).

The recent pullback has shares of Cummins looking pretty attractive. The stock trades at just 13.2x forward earnings and sports a PEG ratio of 0.7. As you can see in the company's Price & Consensus chart, estimates have been moving higher despite the recent pullback. This could be a wonderful buying opportunity.

Conclusion

While some investors may be running for the exits, the fundamentals of the market look solid. The recent pullback may be presenting an excellent buying opportunity for some very strong companies.

Of course, if this recent pullback is a prelude to an actual recession, these stocks will likely continue to get punished. But unless you hear management changing their bullish tune or see analysts lowering their estimates, these four companies should continue to deliver strong results.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

Read the full analyst report on TWI

Read the full analyst report on CMI

Read the full analyst report on CAT

Read the full analyst report on TKR