Your Investment Checklist for the Rest of 2009

If the second half of this year is only one-tenth as volatile as the first half of the year…buckle up!

The way it’s shaping up the markets are in for a stressful trip on a windy road.

This can be good or bad though.

Regrettably, folks investing in the mutual funds, a broad basket of large-caps stocks, and index-tracking ETF’s will likely end up back where they started.

On the positive side, Investors who stick to companies with attributes which allow them to thrive in an economy like this will fare much better.

Basically, over the next few months we’ll start to see a division between poor, good, and great companies. Investors will flock to a company proves it is able dealing with the current and future economic malaise.

Add to the mix a large portion of investors who are still somewhat shell-shocked from recent market “action” and you’ve got a situation where most stocks go nowhere at all, a few will fall by the wayside, and even fewer will do exceptionally well.

Here’s a simple checklist to help you invest successfully, and safely, for the rest of 2009.

Safety First

To get an understanding how investors determine the next groups of winners from losers, we’ve got to look at how investors are thinking right now.

A recent survey by Barclays tells us quite a bit about what “most” investors are thinking right now. The survey, taken a few weeks ago, asked 2100 high net worth (HNI) investors what they thought about the economy, the stock market, and whether they participated in the recent rally. The results may surprise you.

According to the survey:

68 percent expect risk of further drop in asset prices is to significantly impact decisions

50 percent said they will devote more time to selecting investments

88 percent said that opportunities exist in the current market

Only 27% (average) said they are “most likely” to increase their portfolio risk

Do you notice a few overriding themes?

Clearly, these investors are seeking safety and will be exercising more caution.

Long time Prosperity Dispatch readers may remember how investors have developed a “trust” with stocks over the past 27 years. The multi-decade, secular bull market trained investors to “buy the dips” and you’ll be rewarded. Mr. Market said it may take a while, but it’ll be worth it. Even during huge corrections like the tech crash and 1987 market crash, the trust was never broken. It was more likely reinforced.

This time around though, the trust has been completely broken. Banks stocks, whose dividends were great for widows and consistent gains were perfect for orphans, were one of the most trusted sectors.

All of the trust has been completely shattered. Fear has overtaken greed as the dominant market driver.

As a result, the rest of the year will be driven by a search for safety months. Any new money will be focused on safety, and will move back into the markets with a plodding caution, and we’ll see a period when fundamentals matter again.

Slow and Steady Set to Win this Race

We can’t forget an asset’s true worth is only what someone else is willing to pay for it. The markets are driven higher by new money coming in and they fall when money pulls out.

Considering most of the money is focused on safety, we can expect shares in stable companies to do the best. I’m talking about consistent earnings, stable dividends, and companies with simple business models (ones which you can understand) to do the best.

That’s why I’m looking for shares in companies which are:

Paying Dividends – Income will start fetching a solid premium. Dividends will become cool again.

After all, a flat market with the Dow bouncing back and forth between 8,000 and 9,000 will make regular dividend payments much more desirable.

Red hot growth stocks will be out of favor. Consistent dividends and moderate valuations will be in favor.

Providers of Essential Services – The flight to safety will lead investors to pay a premium for recession- resistant stocks. Although we’ve successfully disproven the “recession-proof” myth throughout the past year, there is still plenty of room for goods and services consumers need.

You’ll see a lot of commentary with the oversimplified rationale of “people have to eat/go to the doctor/turn on the lights/etc.” This will provide the justification for rallies in the agriculture, healthcare, and utility sectors to name a few.

It may be a terribly flawed rationale over the long term, but you’ve got to take what the market gives you. In an era where safety is paramount, businesses providing the essential of life will attract more investors than businesses which live off of discretionary spending. Think Wal-Mart vs. Tiffany & Co.

Expanding Operating Margins – As the ultimate sign of growing demand, operating margins should be watched even more closely. Remember, if operating margins are expanding, a business is getting more profit for each dollar in sales. Expanding operating margins almost always leads to predictable growth in earnings and gives boards of director room to increase dividends.

There won’t be many companies that can do it during this recession, but those that can will and their shareholders will be well rewarded.

Growing Backorder Logs – The ultimate sign of stability is a growing backorder log. A company facing a growing backorder log proves demand for its products is strong. They also allow companies to plan more effectively for rest of the year. Growing backorder logs are a great indicator of a company with actual growth opportunities ahead of it, instead of expected opportunities for growth.

Benefactors of Government Contracts/Involvement – Stimulus spending is going to get ramped up in the next few months. The companies with the right connections are going to get their cut of the action. Also, as state governments ratchet up taxes, it’s going to be even more valuable to be on the good side of the federal government’s growing budget.

There are a lot of companies which live off the government. Not all of them will do well. For example, we’ve talked about infrastructure stocks ever since the stimulus was unveiled. We rightly determined they might get a few federal contracts, but it won’t be enough to offset state spending.

Although you’ll have to be a bit more careful when it comes to government contractors, it’s still a great place to start. There’s about $4 trillion freshly printed reasons to consider this sector.

Follow the Money

Market sentiment has come a long way from the near-panic levels reached last fall. And although the markets haven’t recovered to their past highs, and probably won’t for a long time, sentiment is slowly starting to change.

As the survey shows, most investors have become much more cautious. The days of taking a big hit and being able to moderately quickly make it back are over. Mistakes take a greater toll now then they have in the past 27 years.

Despite it all though, these are the financial markets and they’re driven by money. With nearly $4 trillion worth of money still sitting on the sidelines, opportunities may be fewer, but they’re still there.

By Andrew Mickey

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