Shaping a Portfolio for 2010 (IV)–Individual Stocks (ii)-Where to Look

I’ve always found it much easier to figure out what’s likely to go wrong than what’s got a good chance of going right.

A company owes $1 million to its banks; interest expense is $70,000 a year.  But the company only generates $20,000 a year in revenue.  Trouble!

A company has a great new portable communication device.  Is it Blackberry or XM Radio?   or a company invents a social networking concept.  Is it Facebook or Friendster?

This is especially true with stock market upturns, which start in an atmosphere of fear and pessimism, where there isn’t much help for thinking positive thoughts.  Because the ongoing recession is accelerating the demise of newspapers and local television, media gloom is unusually intense today.

Despite the fact that looking for sources of economic strength won’t be as specific at this stage of the business cycle as one might like, and although the attempt may smack a bit of wishful thinking, here are the areas I think are important to focus on now to prepare for a stock market upturn.  I’m going to list some ideas now and develop them in subsequent posts.

–4%+ dividend-paying stocks

–pent up demand.  In bad times, people postpone purchases of big-ticket items and trade down to less expensive versions of what they do buy.  This creates a reservoir of demand which tends to be satisfied in a hurry, once consumers believe their jobs are safe.  What will the characteristics of this demand be in 2010?  There are consumer stock beneficiaries, industrial stock beneficiaries.

–highly leveraged companies/”near death experiences”.  Hotels are a good example.  At (about) 50% occupancy, a hotel may have no cash at all; at 60%, it will break even on its financial reporting books; at 70%, it’s rolling in money.

–non-bailout banks, especially with emerging markets exposure

–smartphones, netbooks

–winners (if you can find any) from the relentless evolution of the internet

–secular growth stocks

–Korean automakers (maybe).  Good news=market share gains in the US; bad news=Korean capitalism isn’t like the US variety

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