On Bottom Fishing

Believe it or not, I'm no "perma bear." And from studying the history of markets and economies, it has become very clear that some of the best opportunities can be had during periods of falling prices. Ultimately, the best opportunity happens when prices stop falling. This is the one we all wish we caught and talk about for decades after. Buying stocks in '33, or '82. Commodities in '71 or '99. Real Estate in '42 or '91.

The one thing it seems is common to all those times is that nobody is talking about buying. It's not that there is a wave of negative sentiment. There is no sentiment, because nobody cares anymore.

That is not the case yet with stocks. When they finally hit bottom, CNBC will likely no longer have enough viewership to continue. The daily ups and downs will disappear from the newscast, or a least be relegated to the back end - after the weather and sports. The very mention of the stock market will bring forth the most foul-tongued responses from quaint old ladies and former stock jobbers alike.

But in the meantime, there will be opportunities to profit from either direction of the bear market. There are times to be short or fully in cash, and there are times to be partially long. We are shifting from the former to the latter (or at least I am). I'm still in the process of shedding my puts, ensuring that the transition is a smooth one, not sudden and kamikaze-like. But it is now time to start looking at potential vehicles to consider should we arrive at a "slap me silly" buying op.

So I will share my process with my readers in the hope that it is of some help. Back in the dog days of November, when it looked like the world was going to end, I wrote, "Looking for Relative Strength." At the time, I was looking for companies that were still rising, or at least holding above their October lows. Indeed, the group of stocks I indicated ended up massively outperforming the S&P over the following 2 month rally.

Again, I am looking for stocks that are in a technically solid position, have strong cash balances - exceeding their debt, decent business models and attractive earnings. Oh, and it would be nice if they were trading at a respectable multiple relative to those earnings.

I'm not going to lie to you folks. There isn't much that fits those criteria. Many of the companies that are trading at decent valuations (under 10x 1 year trailing earnings) and pay a dividend are saddled with incredible amounts of debt. Telecommunications, and utilities come to mind. The big pharma stocks are at risk of increasing competition from generic producers (not that I disagree with it), and also from government competition.

Many of the stocks with strong balance sheets and good business models/growing earnings are trading at absurd multiples of 30+ and paying no dividend.

There are a lot of small caps that look to be in a decent position, but they require constant financing via share dilution. Any share rallies will be met with such dilution, so it's something I want to avoid.

In looking for stocks that have been unmercifully punished, you run incredible risk of waking up one morning and learning that your trading vehicle announced XX Billion in losses and opens 30% lower.

So there is not a lot to offer from many of those sectors. I am avoiding utilities, telecom service providers, big pharma, financial services, retail, insurance, most commodity producers, and anything else that could conceivably be persecuted by a populist president looking for something to tax. The pickings are slim. Which may or may not be a sign that a near-term bottom is actually close.

The following is a list of companies that are in sectors I think are relatively safe from opportunistic politicians or debt problems, and/or have been displaying decent technicals that suggest some relative strength.



As you can see, there is nothing on this very incomplete list that screams "buy me". But they are in better positions than many of the other companies their size. Ultimately, at an earnings trough, I would want to see these companies trading at P/E values half their current levels.

Technically, many of these are looking very vulnerable, displaying the dreaded "rounded top." Consider cash-king Cisco:



Standing in front of a chart like this seems suicidal.

However, more expensively priced (relative to earnings) is a company like Google, which looks a little healthier:



But as I said, nothing here is screaming at me to buy it. It all looks like it wants to go much lower. Perhaps I'm being too picky. But I'd rather miss a multi-month rally than risk a significant portion of my capital by standing in front of freight trains.

If I do decide to get bullish it will likely be something from that list. Unless my readers have some other ideas? Thoughts?


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