5 Top Stock Picks for a Bear Market

In In A Market Like This, What Do You Do?, I intimated to you that I’d do some research and report back to you on what I found. Here’s a first attempt at that. “Stock Screeners” like the one offered by Yahoo! are awesome! You can filter on TONS of different criteria.

For this stock screen, I used the article, 40 Stocks for the Long Haul, as the starting point. Here’s my criteria:

  • Return on Equity >= 15 percent
  • Zero total debt
  • Free cash flow > $1 Billion

Here’s what I found.

  • Apple (AAPL)
  • Texas Instruments (TXN)
  • Google (GOOG)
  • EBay (EBAY)
  • Nvidia (NVDA)

 Apple has over $6 billion in free cash flow, an ROE of 27 percent, and a PE of 16. They are the market leader for mp3 players. They’re gaining in PC sales. And it’s because they are a tremendous company comprised of excellent management. Market share for their music and cell phones is very good.

In fact, as consumers tighten their belts, they will go one of two routes: Cheap or premium. Here’s why they’ll go premium: Kids won’t have anything but an iPod to play music. You’re wasting your money buying anything else. You’re better off buying the bottom-end Nike than the top-of-the-line Converse, if you know what I mean.

Oh, yeah, in this credit-seized economy, Apple has no debt. And more cash in the coffers than Microsoft.

Texas Instruments makes the inner-workings of high-tech products like computer chips. As businesses shed employees, they’ll look to technology to meet some of their challenges. TI also makes calculators for the education market that more kids will need if they want to compete in the global economy. I’m not overly-bullish on technology companies right now; they’re usually capital-intensive enterprises, where bad quarters lead to worse quarters. But TI has no debt.

They’ve also returned 24 percent on shareholder equity (ROE), they have $3.8 billion in free cash flow, and they’re the leader in their industry.

What more is there to say about Google? Free cash flow over $3 billion and a 21 percent ROE, they are the only player right now in the online search market. They have geniuses at the helm and all throughout their organization, and the key thing? Search isn’t even what they’re best at! Nope, it’s advertising. They’re VERY good at using every one of their pages as a billboard for a business. And they charge for it. It’s a highly-effective and -efficient model.

While I believe ad sales will decline as businesses try to cut costs, they won’t go to zero, and, like Apple above, there is no real competition for the services that Google offers.

Ebay is likely to get even bigger as consumers cut spending on unnecessary goods. Note, though, that people will not stop buying things; they’ll just stop spending as much. The logical places to go are Ebay, any of a number of discount stores like the Dollar Store, and Wal-Mart.

Ebay has an ROE of 18 percent and free cash flow of $2.3 billion.

Finally, I wasn’t sure I wanted to include this one, but I was going for the top 5 in the categories I chose, so I’m including it. Nvidia, the video card and motherboard chip maker, is the leading brand (there’s only one other, ATI, in the high-end video card space) and is only getting better. I know, I have their motherboard in my PC and it’s the best one I’ve ever had!

Nvidia has a free cash flow of just over $1 billion and has an ROE of over 22 percent.

Like the other market leaders in this bunch, they are likely to gain market share now while others pull back. This rise in share will allow them to maximize their profits in their niches. This is a long-term play for sure.

In conclusion, all of these companies that I’ve talked about here are well-run, profit-making, and market-share taking machines. They’ve been beat down with the rest of the market, but because of their innovative businesses, sound management teams, and excellent free cash flow, not to mention zero debt, they’re poised to make a quicker and more profitable comeback when this economy finally stabilizes and starts to grow again.

Money isn’t everything. It’s the only thing. Wait. That’s only for football.
Enjoy life. Spend time with your family.


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Patrick - November 3, 2008 Reply

What do you think of Cisco? Based on the criteria above I think they are going to be gaining even more market share and are poised to grow as companies tighten the belt on things like travel and use more internet technologies to collaborate.

billspaced - November 6, 2008 Reply

Cisco has more debt than I’d like. They also made a newsworthy announcement today (on the negative side), so its price may fall and it might be a good time to pick it up.

Related to their announcement, and I admit I’ve been out of the IT world for a while (back when Cisco was the only real game in town), I can’t see demand rising any time soon, with the current economy.

Since they don’t offer a dividend, there’s no immediate payoff. So, I’d wait, and only buy in a little at a time on dips.

After all, it is at half its 52-week high, and, in my opinion, heading lower in the short term. Tomorrow may very well be a buying opportunity.

For a stock like Cisco, you’ve really got to have some patience. But if you can afford to wait, you could make a killing when the economy begins to turn early to middle of 2009.

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