15 Stocks with the Stamina to Survive This Crisis

"A lie sprints, but truth has endurance" is one my favorite anonymous quotes and also the theme for today’s report. It seems as if the market may be reaching another one of its inflection points whereby one is forced to reconcile the perception of a faster recovery with the reality that some of those green shoots just might be dandelions. Since the major correction that began in earnest on Jan-06-2009 and bottomed on Mar-06-2009 for a 26.89% decline, the S& 500 has returned over 38% as of last Friday, June-12-2009. During this period, the market has "dissed", as in discounted, almost every piece of bad news or economic data.

Bulls have exacted revenge upon the bears and any who failed to escape or refused to convert were rounded up and shot at close range. "All is fair in love and war" has never rang truer. It has been a bloody battle and those bears, myself included, with enough sense to avoid a battle that could not be won, have either gone underground or turned coat as traders (or traitors) and partaken in the spoils of war. There is no shame in staying alive and plundering a few ill gotten gains during this rally, even if one is a dyed-in-the-wool Cassandra spouting bear (of which I am not).

Speaking of spouting, enough of it from my superfluous pen. The real purpose of writing this report is to underscore the potential gifts of opportunity that almost inevitably accompany any sort of change in the market or economy. Regarding the economy, I am of the mindset that things may become worse while they get better at the same time and we may have troughed or are approaching such an event in this cycle. Quoting one of my favorite sayings from a Prussian general who disciplined his troops with "the beatings shall continue until morale improves", the market appears to have finally adopted this lesson as morale has improved significantly for now. Let’s leave it at that. For those who believe that no one can control the market, I beg to differ as I do indeed possess such rare capabilities. I only need make a guarantee or prediction with absolute conviction and the market will do exactly the opposite of what I claim on almost every occasion.

Getting back on track again, if the market does actually undergo a correction, I do not think we will see a retest of the March-2009 lows. Mind you, I am basing this rationale upon technical analysis and beg pardon from the fundamental purists (you know who you are) out there for my heresy or blasphemy. Currently, the equity markets (i.e. the Dow Jones Industrials, S&P 500, Nasdaq 100, and Russell 2000 indexes) are in short-term downtrends. For the doubting Thomases or other critics too mentally lazy to check for themselves, you will have to trust me on this one or set aside your own time to confirm the trends for the other major equity indices as I am only going to use the S&P 500 benchmark index as an example. Should we experience a full 61.8% retracement correction, then we are confronting a downside target at 785 or a painful -13.83% instead of the apocalyptic 666 or -27%. For the latter number to become a legitimate possibility, the market will need to violate its intermediate uptrend and the morale of investors would need to significantly deteriorate. A quick review of my daily trend analysis table shows that all 4 of the major equity indices are still maintaining their intermediate uptrends (see recent Market Condition Summary report).

Chart #1

Chart #2

Whether any of the above occurs concerns me not at all. Instead, I am looking for opportunity to acquire good stocks at cheaper prices relative to where they stand today. To begin, we must first construct a definition of a good stock. Depending upon which phase of the economic cycle (i.e. peak, contraction, trough, or expansion) we are in, the definition of what makes a good stock will vary. As I view the economy still in a state of contraction and at best in a decelerating free fall that is converging towards a trough, the current environment remains scarce of liquidity and credit. Yes, the Fed has been desperately priming the pump with its extraordinary stimulus efforts, but most of this liquidity is being sucked up to replenish capital requirements demanded from bad loans or administered to "financial vegetables of state fair proportions" on life support instead of the small businesses (must get one in for the team whenever there is an opportunity) which are vital capillaries for delivering growth, employment, and innovation throughout our economy.

While the dollar is likened to trash, the king remains cash. Therefore, in such an environment and in the event of a market correction, I prefer not to fret about whether tomorrow’s tomorrow will ever arrive safely, but take great delight in watching the share prices of "alpha male equivalent" companies fall despite their being financially solid and demonstrative of generating consistent and sustainable levels of cash flow in this environment. Forget about short-term or intermediate bull market rallies. This is the booty to which I am attracted as the battle wages on between bulls and bears. Getting back to my theme of "lies sprint, but truth has endurance", all sorts of chicanery can be called upon by the imagination of man when it comes to earnings, but cash flow is more difficult, though not impossible, to manipulate than GAAP earnings which are vulnerable to channel stuffing. I believe the cash flow fundamentals of these companies are true enough to weather the economic storm, and position them to survive and prosper even more once the economic expansion resumes.

Here are my criteria and rationales for qualifying companies:

1. Cash ratio in excess of 1: a conservative measurement of liquidity
2. Price/Cash Flow < P/E: as mentioned above, earnings are more susceptible to manipulation than cash flow
3. Pays a dividend with payout ratio <= .50: a dividend represents a commitment to shareholders and the sustainability of it says a lot about management’s attitude towards owners
4. 5 year average annual sales growth > 10%: top line growth drives cash flow and earnings while restructuring and cost cutting eventually must face their limitations
5. 12 month return on equity > 10%: winners make it happen and losers let it happen… effective management always deserves attention
6. 5 year average return on equity > 15%: consistent effective management deserves even more attention
7. 5 year average EPS annual growth > 10%: consistent and sustainable bottom line growth is always attractive and says a lot about a company’s position within its industry as well as industry opportunities
8. Projected 3-5 year EPS growth >= 5%: while the economic situation remains unclear, companies that have some visibility on their earnings should also be noted

Some of the companies that qualified are ones with which I am quite familiar on a qualitative and fundamental basis. However, time does not permit me to give an individual summary analysis for each one and my objective is not to provide specific recommendations but create a reference list for further due diligence by individual readers. A few others, based upon their quantitative metrics, appear worthy of further investigation, so I have included them as well. Below is a list of the results:

In summary, I believe this list makes a good starting point for a reference watchlist worthy of a reader’s individual due diligence, if warranted. Sometimes being the last man standing is all that is required of a champion. Often, it is not how fast one runs or how hard one hits, but instead having the stamina to survive economic cyclical busts and coming out on top is what distinguishes a real champion. This is especially true in the stock market. While lies may sprint, true cash flow always holds the advantage of endurance.

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[mwfall:]

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports

what kind of a dumb disclososure is that? anybody in the world "may" own a stock.

Jun 17 01:21 PM

[swellcat:]

" . . . retest of the March-2006 lows."

Typo?

Jun 17 11:13 PM

[coloneldebu...:]

American Eagle, Coach, Guess, Van Huesen, Buckle?That seems like an awful lot of fashion related items.

American Eagle will live or die on the whim on teenage trendiness. The same but less so for Guess. Van Huesen will probably continue to have market share in the business world.

Coach is a suburbanite soccer mom merit badge. They seem more like a short to me, especially if the shift away from paying 10 times more for a purse than necessary sticks.

This is the first I've ever heard of Buckle.

Full disclosure: I'm wearing Levi's today that I've owned for more than three years and Merrill shoes that I've owned for about two years. My shirt was either a birthday or Christmas present.

Jun 18 10:27 AM

[Rollerball:]

Good fundamental analysis. Unfortunately, fundamentals don't matter anymore. Everything is a trade.

Disclosure: Went long GES on earnings and upside guidance and losing 2%/day ever since.

Jun 18 05:54 PM