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7 investing themes for tough times

Investor Daily: Here's where to find the few stocks that could beat the bear market.

Last Updated: November 11, 2008: 10:22 AM ET

NEW YORK (Fortune) -- As the bear market becomes situation normal, successful investing has become more a matter of "my stocks are down less than your stocks." But should it be? The old adage is that any fool can make money in a bull market and we saw that writ large over the past couple of years. Making money in today's market takes real skill. The question really then is what kind of stocks could possibly go up in this market?

Well, first of all not many. Or at least not many over the past couple of months. Only about 2% of U.S. stocks are trading above their 200-day moving average, which in plain English means that some 98% of all stocks sell for below their average trading price year-to-date. (Next to none are trading at their 52-week highs, by the way.) So stocks are beaten down, which means they could be a bargain, but they could also fall lower. The frustrating point is that SOME stocks will go up over the next year; we just don't know which ones.

To help narrow down the search, I've come up with some investing brain food. Themes that might help you find that select group of stocks that go up.

BE OBAMA-FRIENDLY: A recent Bloomberg article tapped into bullishness about the president-elect's position on compressed natural gas as a source of automobile fuel. That moved stocks like Chesapeake Energy (CHK, Fortune 500), Devon Energy (DVN, Fortune 500) and XTO Energy (XTO, Fortune 500).

TAKEOVER BAIT: There will still be mergers. In fact bear markets can spur this activity. In tech, giants like Oracle (ORCL, Fortune 500) and Cisco (CSCO, Fortune 500) are known to be acquisitive during such times - i.e. take a look at smaller software and networking companies. (And don't forget Yahoo (YHOO, Fortune 500)!) Banks will also be bought out, but that is a most dangerous game. Energy too: Chesapeake (see above) has been mentioned as a takeover candidate. You didn't want to own these stocks on the way down, but now the time may be ripe.

THEORY OF RELATIVITY: This is all about not having to run faster than the bear, just running faster than your fellow hiker. (Ouch!) Time Warner (TWX, Fortune 500) - yes my parent company - recently announced third-quarter earnings that were decidedly blah, but here's how the AP saw it: "Time Warner 3Q profits beat expectations." And so TWX stock is up a smidge over the past ten days (I'm using that period because it includes trading days before the announcement whereby investors may have anticipated the news) while the S&P 500 and competitor Disney (DIS, Fortune 500) is down. Of course that is a small victory for long-suffering TWX shareholders, but you get my point about beating expectations.

BUYBACKS: Yes we know this can be a false promise, but with lower stock prices this strategy might actually make sense. An example here would be US Cellular parent Telephone and Data Systems (TDS, Fortune 500) announcing a $250 million buyback. Not huge but enough perhaps. That stock has been up recently.

DIVIDENDS ARE YOUR FRIEND: Cash is king in this environment as Fortune's Shawn Tully recently wrote. (Why do I always confuse Shawn with Cary Grant?) I don't think that it's too late to buy stocks after companies announce dividend increases, by the way, because in this environment you can see investors moving more and more to dividend payers. Check out Questar (STR), Emerson Electric (EMR, Fortune 500) and even Vornado (VNO) if you can imagine.

FRUGALITY: As in look for companies that are cutting costs, or even scaling down. But be careful here. Look at this story: "Investors send Genco Shipping shares higher after it drops orders for six ships, freeing up cash." Only problem is the market changed its mind about the move and soon sent Genco southbound. (Oh. Never mind.)

EARNINGS: Remember some universal truths still apply. John Eade, who is the CEO and director of research at Argus Research, says this: "What makes stocks go up, consistently across the board, in any kind of market, are growing earnings. We've been in a market environment for five quarters where overall, corporate earnings have been falling and [we're] looking ahead toward lower earnings in 2009."

Is there any hope John? "The areas where our analysts are actually seeing some strength would be healthcare. They have been increasing their estimates for pharmaceuticals, biotech and medical devices." What names? Eade says companies like Baxter International (BAX, Fortune 500), Abbott Labs (ABT, Fortune 500), Schering-Plough (SGP, Fortune 500), and Johnson & Johnson (JNJ, Fortune 500). The other area is in for-profit education. "I guess people are losing their jobs and thinking it's going to be a while before they get a job. They're going back to school and taking courses at traditional colleges and schools but also these for-profit universities." Here Eade points to ITT Educational Services (ESI) and Corinthian Colleges (COCO). Makes sense, right?

Again, some stocks will be winners. Finding them is the trick. Let's hope by this time next year things are looking up.

Has the stock market turmoil made you nervous about how to invest now? Ask us your investing question and we'll answer it in our next Investor Daily. E-mail Fortune.  To top of page

Company Price Change % Change
Bank of America Corp... 15.25 -0.33 -2.12%
Micron Technology In... 30.55 -1.98 -6.09%
Apple Inc 95.60 -2.55 -2.60%
Facebook Inc 72.65 -2.03 -2.71%
Pfizer Inc 28.70 -0.56 -1.91%
Data as of Jul 31
Index Last Change % Change
Dow 16,563.30 -317.06 -1.88%
Nasdaq 4,369.77 0.00 0.00%
S&P 500 1,930.67 -39.40 -2.00%
Treasuries 2.56 0.00 0.08%
Data as of 3:09am ET
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