Wednesday, October 29, 2008

Jubak's 3 rules for stock picking

MSN Money's Jim Jubak still sees stocks heading lower, but he has three rules to help investors find the best stocks in a beat up market.

The first rule on his list was

Look for companies with flexible production and low fixed costs.

He gave Nucor (NUE) as an example, of it he said

The common wisdom is that demand for steel drops in a recession as demand from car and appliance makers tanks. And that common wisdom is absolutely correct. Nucor, in its Oct. 16 conference call with investors and Wall Street analysts, reported it had shipped 13% less steel in the third quarter than in the second quarter of 2008. The outlook for the fourth quarter and for 2009 is so murky, the company said, that it won't venture even a guess at production levels or revenue for those periods.

The second rule was

Look for free cash flow that covers debt payments and is large enough to finance the company's growth.

As an example he gave First Solar (FSLR) the nod but felt uncertainty into 2009 was still too much of a risk for the company, although it was certain watchlist material:

The third rule was:

Look for companies whose customers have the cash or credit to keep buying.

Of this rule he said

Ideally, you want to own shares in a growth company such as Middleby (MIDD). In October, the company announced that Yum Brands' (YUM) KFC chain had successfully tested Middleby's new oven. Middleby's Blodgett Hydrovection oven is the key to a new KFC product line that will include new signage at KFC stores ("Now Grilling!"), a redesign of the company's iconic bucket and a whole new direction for the chicken empire that has never been a bastion of healthful eating.

How will Middleby fare in 2009?

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Thanks to DIV-Net for the latest Zignals Carnival Post.

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts, and stock charts website