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Thursday, April 30, 2009

You Can Still Find Winning Stocks

The best approach to solving many problems is the simplest one, yet some situations seem beyond human understanding.

When we face a problem like the economic and stock meltdown of 2008, the answer must be so complicated that no one can possibly know the answer.

In a macro sense, that's probably correct. The challenges facing our country are huge. It is understandable the people want the problem defined and corrected.

Unfortunately, the economy and the stock market are so big and so complicated that boiling the issues down to a single problem is impossible.

So, what's a stock investor to do?

One answer is to liquidate and put the cash under your mattress until things seem normal again. Of course, the best time to do that would have been many months ago before the market tanked.

If you still need the potential return stocks can offer and don't want to wait out the bear market, you need a strategy that helps you pick winning stocks from the rubble.

There are many advanced trading practices that may help you trade you way to profits. However, most investors have neither the time nor expertise to succeed as an active trader.

While it is tempting to look for exotic or "out of the box" solutions, the answer for many investors is to focus on the basics.

The starting point for finding potential winners in a sea of losers is looking at certain key indicators. These are the most important:

  • Low debt for the industry and lower than its peers
  • High cash reserves for the industry and higher than its peers
  • Positive earnings (or a very small loss) for the industry and better than its peers
  • Will benefit in the early stages of an economic recovery
The last point may be the hardest to nail down, since it involves a certain amount of subjectivity.

For example, a non-financial company closely tied to the housing market may not participate in the early rebound. Why, because by there will be a large stock of product (houses) on the market. This inventory must be worked through before much of the non-financial housing market will rebound.

Companies that sell home furnishings, appliances and so on will see some benefit as new owners buy homes out of the unsold inventory.

You can probably think of companies that will benefit when the economy turns. Check those against the first three bullet points above and this is your starting place.

No one knows when we can expect an economic turn around. The truth is parts of the economy will rebound sooner than other parts. Look for companies that can take advantage of the rebound and there you'll find your future winners.

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