Picking Some Stocks to Survive This Market

I have not done well in the markets for the last six weeks.  Here is why:

• Overweight in Life Insurers.  Yes, they are in better shape than the banks, but that only means they got hit later, not that they would not get hit.
• Too much economic sensitivity.  I felt that global demand would hold up better than US demand, but that only means they got hit later, not that they would not get hit.
• I suspect that hedge funds have been blowing out my positions.

I’ve been talking about stock survivability lately.  What does that mean?

• Low levels of short-term debt.  Few major debt maturities coming in the next three years.
• Low levels of total debt relative to tangible capital.
• Still earning money and producing free cash flow, even in a tough environment.
• If a company is cyclical, it has slack assets, particularly cash equivalents.  High current and quick ratios.
• If not a financial, trading at a historically low price to sales ratio.  If a financial, trading at a historically low price to book ratio.
• Good accounting quality and corporate governance.
• A leader in their industry.  It would be difficult to lose them.

With a little work on my side, I came up with 80+ names to consider, that I think fit the above criteria, mainly:

AAPL ABX ADBE ADP AFG AHL ALL APA AXS BBOX BHE BHI BHP BWA CAS CB CF CHV CINF CLF CMI CRH CSL CTSH EBAY ENH FCX FDS FSR GD GPC GWW HANS HAR HCC HMN HON IBM ITW LNT LOW MHP MMM MRO MSFT MTW NKE NOC NOV NUE NVDA ODP OKE ORCL OXY PC PEP PL PRE PTP RE RHHBY RIO ROC ROCK RTN SHLM SIGI SYK T TEX TMO TRV TYC UTR VCLK WAG WBC WDC WRB Y ZMH

This is a portfolio that I think will do well even in tough environments.  I will be buying some of them on Monday, and will let you know what I did.

Comments

[CrossProfit_:]

You may want to consider changing your overall strategy for the time being. For now it may be best to focus on short term gains to make up part of what you lost over the past six weeks.

Once there is more visibility or stability (as in a lower VIX), then going back to a long term horizon would seem to be more sustainable. However, if you really do intend to stick with your previous strategy, then perhaps you should be looking at companies that have already taken advantage of this mess and are doing so with a longer time horizon in mind.

A good example would be comparing BAC with JPM. BAC has taken a long term approach, whereas JPM has taken the quick return approach. Not saying that banks are up your alley, just pointing how two companies seem to be taking advantage of the current situation and the different ways they do so.

Should you decide to be more short term focused, as we believe is currently advisable, then an attempt to find the short term winners of the 'national bailout' should prove very lucrative. One possibility is some of the Monolines. Perhaps some energy stocks that have been beaten down so much that their future earnings at - shall we say - $50 a barrel are going to eventually force a 30% PPS increase. Be careful though as not all will jump after reporting earnings.

Besides, there is a very good chance that oil will be up 20% sometime in 2009. The logic is simple. If the 'national' and now 'global' bailout succeeds to stabilize the markets and world economy, then as evident throughout the downturn, every time there was a hint of a recovery, oil started to regain lost ground. On the other hand if the bailout fails, then no stock on the stock market is safe. In other words, if your buying anything, you are betting on the success of the bailout. If such is the case, then why not bet on the stocks that have already proven that they go up when the future is promising?

Notice how the term 'bet' is used and not 'invest'. Reflecting current market conditions is a contagious 'healthy' approach!

As an aside, you must find it ironic that Mr. Buffett advises to buy stocks now (or miss the spring as he put it) as he himself is doing. Now if only Merkel and every other investor could buy preferred with a guaranteed 10% coupon...we would all probably say the same!

Good luck.
CrossProfit

2008 Oct 19 07:00 PM

[Football Geek:]

too many stocks, not enough info

2008 Oct 19 11:29 PM

[Bob168:]

How can SA allows this kind of article posted in here? I thought SA supposedly screen for quality article before posting. Disappointing.

2008 Oct 20 03:07 AM

[Jon T:]

Not sure I would have MSFT on that list.

It will be 7 years before a viable - i.e. non-Vista - OS is available since the last one i.e. XP.

And even then Windows 7 may be little more than a warmed over Vista.

- No traction with Search.
- No traction with Zune.
- Declining or reversing traction with Xbox.
- Luke warm response to Office 08. Severely declining prospects for Windows Mobile.
- HP, Dell etc. looking for Windows alternatives.
- Massive spending on Brand advertising is backfiring badly.
- Apple's PC & Mac advertising is severely mauling its core product.

It will face strong headwinds with a scary, rocky coast waiting to receive it to leeward, it is lucky it has some sea-room.

2008 Oct 20 08:17 AM

[Ed O in PA:]

clear as mud.
why not list entire S&P 500?

2008 Oct 20 08:54 AM

[CHICAGAWAUKEE:]

I would add some low priced, higher yielding stocks such as DOW, ED, DUK, MRK, until the market calms down.

2008 Oct 20 10:31 AM

[1les2les3les:]

Ebay - you have to be kidding! You might as well say buy anything cheap.
This co is suffering a major eclipse that I don't think it can recover from. A massive loss of core customers, extremely poor customer relations, loss of trust, disruptive and chaotic management and spin, spin, spin. Oh! I forgot it has just borrowed $1B so it must be ok.

2008 Oct 20 02:11 PM

[tuckerin:]

I would say "what a waste of ink and paper" but this is the net and you get what you pay for!!

2008 Oct 20 06:55 PM

[Jake2:]

Take me to your leader.

2008 Oct 21 12:52 AM

[Tom B:]

Agree with Jon T. MSFT = GM. ZERO execution under Ballmer. And, since Win 7 won't even be UNIX based, like EVERY other commercial OS, it'll still be pretty worthless, with regards to performance and security.

2008 Oct 22 01:00 PM

[Socialism c...:]

@Chicagawaukee: "I would add some low priced, higher yielding stocks such as DOW, ED, DUK, MRK, until the market calms down." ABSOLUTELY! I've bought some ED on recent dips below 40. A 6% yield is nice to hang onto, and I don't think we're shutting off the grid anytime soon.

@JonT & TomB: Again, ABSOLUTELY! MSFT is DIW. Server rooms are going Linux...there goes your enterprise OS $. Consumer is DIW. OpenOffice = no need for MS Office in these economic conditions. I see little reason to expect much from MSFT for at least several years!

I'm going with some yields: ED, INTC (for the long haul - it will suffer from the short-term consumer dip like MSFT, but has much better product & strategy!), NLY (benefits from steep yield curve & declining LIBOR...& the Feds are backstopping the mortgage debt. Currently yielding 18%...what's not to like?), KO (declining commodity prices, still growing abroad & continued expansion in non-carbonated segment).

2008 Oct 23 05:05 PM

[Tom B:]

To "Socialism": I'm with you on DUK and INTC; I have big wads of them in my portfolio.

I don't like MRK as a long-term play. They are trimming R&D to save money for the short term, at the cost of further the diminishing the chances that their thin product pipeline will fill up anytime soon. I'd go Abbott or JNJ.

T might be good; they are SPENDING money subsidizing the iPhone now, and this will reap lots of expensive voice/data plans. I like TEF and FTE as well.

2008 Oct 24 02:24 PM