Top value investor Ron Muhlenkamp says he’s finding attractive stocks in the market right now, but that continued selling because of fear or a need to meet margin calls could keep stocks headed downward in the short term.

“If we see signs of indiscriminate selling, we will continue to move to a cash position in order to sidestep the decline; otherwise, we will be looking to invest in companies we think will do well going forward,” Muhlenkamp wrote in an Aug. 9 commentary on his firm’s web site. (Click here for a PDF copy.) “We suspect the companies that do the best going forward will be different than the ones that outperformed the last few years,” he added.

Muhlenkamp said he thinks the recent sell-off was driven by fears surrounding European debt, not the U.S.’s own debt woes. “From an investing perspective, the [U.S. debt] downgrade is irrelevant,” he says. “From a political perspective, it may be very significant. … What we do know is that yesterday, U.S. Treasury bill interest rates fell dramatically as investors rushed to buy U.S. government debt — not what you’d expect if they were worried about getting paid back.” He thinks that Italy and the European Central Bank are underestimating the severity of the debt crisis in that part of the world, and aren’t taking sufficient actions to prevent Italy from being “priced out” of the debt markets.

In the short term, Muhlenkamp expects some trouble. “The outlook for the next month or so isn’t good,” he says. “Europe has major problems and the parliaments are all on vacation. If this develops into a full-blown liquidity squeeze or banking crisis, it will get ugly. I expect European leaders will be unable to get ahead of the problem for at least six weeks. I think the problems in Europe will impact the decisions of businesses, consumers, and investors in the U.S., and make a recession more likely in the near term, not less.”

Muhlenkamp says, however, that he sees “a lot of good companies selling at prices we like”. But, he adds, if investors start selling indiscriminately because of a need to meet margin calls or because of fear, valuations “won’t matter for a while”.