Who needs declining revenues?

Who needs declining revenues?

By VultureAlert.com

Revenues are overrated in a recession...literally, most companies miss their earnings estimates and all hell breaks loose. Companies from chicken producers to premium coffee outlets to computer network companies have missed their estimates and have seen their stocks downgraded by analysts world-wide. It's enough to make you puke. Yes, PUKE! This is further driving the panicked selling of large, mid and small-caps across the board.

Here's a new one for ya: THIS IS A GOOD THING! Companies that sell stuff and create revenue have been on a hamster wheel the last 5 years...sell more and make a bigger profits each year, GROW at all costs. Well, what goes up must come down at some point! And they sure are coming down a lot faster then they went up! Some will inevitably be oversold.

The mood of the market is just horrid at the moment so pair down the number of stocks you own and focus on the amount of cash they have compared to debt. For larger cap stocks, use P/E ratios...look for companies that are trading well below the average for their sector. Historically, companies included in the DOW Jones index have had P/E ratios of about 10. Right now, you can find many companies well below this. Miners have low P/E ratios as a norm usually around 10 to 25 so look for producers that are around a 3 to 10. Also, look at yields (dividends) and try to invest in companies that pay 5% or higher and make sure you reinvest the dividends. By doing this you can use the rule of 72 to find out how long it will take to double your money...take 72 and divide it by the yield rate and this tells you how many years it will take to double your money. For example: World Wrestling Entertainment (NYSE: WWE) pays a 9.4% yield so even if the stock does nothing your investment will double in 7.6 years. It doesn't hurt that at this time the stock is at an all-time low although, the P/E is around 16.5 meaning that it's starting to get in the cheap band however, these things usually overshoot both on the up and downside so picking the absolute bottom is difficult.

See below for a chart showing the S&P 500 P/E Ratios from the 90's until the end of 2003:

Let's not forget about the other class of companies out there: ones that don't earn revenue and as a result haven't seen a drop in revenues. These are companies that provide investors with high risk/high reward opportunities. They are your blue sky and should represent a small percentage of your overall portfolio. This SHOULDN'T CHANGE!!!

Risk has never been so cheap! Companies with great vision, leadership and strong cash positions should be on your radar screen and prime for the picking. Some say the juniors are done, no buyers for years to come...we say BS! Certainly, volumes have decresed because most of the leveraged stock has been sold and now actual cash is backed up behind most trades. As has often been heard on the street lately, "it's a lot harder to actually pay for the trade with real money." However, this economic downturn has made people very risk averse and has oversold many good stocks that are in the small-cap sector. So much so, that some companies are being valued BELOW cash value!!!

Take a top-down investment approach, look at sectors you feel will become more important or could even grow in a recession and look way down at some of the juniors in this space. Take the clean tech sector for example, if GM and others retool and build more hybrids or electric cars then more batteries may be needed and as a result more lithium for the batteries will be needed. Looking at the TSX Venture exchange for a lithium junior you'll find Western Lithium (TSXV:WLC). The stock made a new low today, some 80% off its high for the year. As mentioned earlier in this article, risk has never been so cheap. Find a few companies that make sense, slowly build small positions and wait for the market to reward risk again. We feel this will happen once the credit markets thaw out and begin moving again...hard to predict when but we see this as job#1 for new President-elect Obama and as such have a bullish view that credit cmarkets will begin functioning again within 3 to 6 months. And once this happens, you'll miss out on the bargain basement stock prices!!!

VultureAlert.com