5 Lessons On Picking Low Hanging Fruit

 |  Includes: HAL, KR, SLB, TGT, WMT, XOM
by: Tom Mongan, CFA

Some analysts have an ability to get right to the key issues, an important step in picking winning investments. Several years ago I ran across a good example in a book, whose title and author now escape me. One passage tells about a guy lamenting to his friend that the country is in the throes of a heroin epidemic. The friend asks, "Who sells the needles?" The question carries a message that all research directors know. A good analyst's or money manager's instincts can pave the way to investment success.

Think about where the question above was leading. Lesson 1: Go where the money is. Legendary bank robber Willie Sutton said he robbed banks ". . . because that's where the money is." If the economy is in a growth mode and the demand for technology seems insatiable, technology stocks are a logical choice. Utilities may be great, but they do not project growth. Tech stocks do. Likewise, energy and health care will face growing demand for years. Take advantage of demographic, technological and societal changes.

The next place to find low hanging fruit is to look for the second derivative players, the suppliers and facilitators. Lesson 2: Pick the companies that make money from the companies making the money. For example, Exxon (NYSE:XOM) is a major oil company. Who helps Exxon get the oil? Companies like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL). There are hundreds of possibilities, and some will have more growth potential than others. Use your imagination in picking the stocks.

Now take that a step further. Some of the suppliers might be the big boys. Both SLB and HAL are industry leaders. Schlumberger has 1.33 billion shares, and Halliburton has 923 million shares. Lesson 3: Look for companies that offer the investor a more significant ownership position. Who else participates in the exploration and production effort? There will be hundreds of companies in the process that take the product from the ground to the consumer. Maybe one or more of these will be the goose that has your golden egg.

The market always has some undiscovered jewels. Lesson 4: Find the overlooked alternatives. We can easily see the reasons that people have been enamored by Wal-Mart's (NYSE:WMT) success. Their growth, their delivery methods and their inventory control have been extraordinary. But history has shown us that there seldom is just one solution to the market's challenge. Maybe Target's (NYSE:TGT) numbers and market acceptance offer similar growth opportunities at a better price. WMT is also one of the leading grocers in America. But what about Kroger (NYSE:KR)? It has been equally competitive. Other stocks in this business also offer growth opportunities. You can run the same drill in the pharmaceutical business, in telecom, consumer discretionary and throughout the market. There are winners everywhere, and weak stock markets like today's offer an opportunity to look beyond the obvious.

Finally, good quarterbacks complete passes by throwing the ball where the receiver is going to be, not where he is when the play starts. Lesson 5: Invest where the market is likely to evolve. Example: If energy independence is a valid goal, and if oil shale within our borders holds enough energy for U.S. needs for the next 1,000 years, maybe we can find examples of lessons 1 through 5 in shale production and delivery. Besides the major oil companies, there are smaller operators, drillers, service companies that provide the hydraulic fracturing needed to extract the oil and gas and pipelines that get the product to the refineries and ultimately to markets nationwide.

There is plenty of low-hanging fruit out there. Your challenge is to be like the winning quarterback. Make your investment where the action is going to be.

Disclosure: I am long XOM.