Goes to show you. Fool me once, shame on you. Fool me twice – we won’t be fooled again.
Until the next time.
From the latest email newsletter of Whiskey and Gunpowder:
The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake. It’s like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve.
They’re saying the economy is surely well on its way to disaster. I’m not so sure. YET.
Retail reports will be out soon regarding the crappy shopping results. I’m sure it will be worse than expected.
Which is it? Tell me your view in the comments.
Happy holidays. In spite (or because of?) it all.
Money isn’t everything. It’s the only thing. Wait. That’s only for football.
Enjoy life. Spend time with your family.
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:
Here’s what I found.
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.
What does an investor do in times like these? The market is volatile and falling far more than it has risen the last month. Do you bail? Invest in Bonds? Put your money in banks?
One strategy you can try is to pick individual stocks. What should your criteria be? I’d suggest choosing only high-quality companies (note I didn’t say “stocks”) with flawless balance sheets, huge cash flow, zero debt, and high yields. Are there any companies with these qualifications? I’ll do some screening tomorrow to find out and I’ll report back here.
Several months ago, I began preparing for a precipitous fall in the stock market (because I’m omnipotent — NOT) by selling a lot of assets and using the proceeds to buy an ETF that shorted the market. I did quite well during the downturn, maintaining my overall capital through the worst of the market fall.
When the government announced that they were going to be investing in banks, I sold a lot of the ETF but I also sold a lot of my other positions.
Here’s my conundrum: What do I do with a lot of cash in a 401k plan? I mean, I’m not losing 5 percent every day, but I’m not gaining either. This, coupled with the fact that I think we’ve got farther to fall, makes me inclined just to stand pat. But I don’t want to miss the bottom, either.
The strategy that I think I’d employ if I thought we were near the bottom would be to start picking up individual stocks that had solid, high dividend yields.
What do you think? How has your 401k stood up to this market downturn? Do you think we’ve hit bottom? Are we on the way back up? Leave your answers in the Comments.