February 24, 2009 - When investors lose money as fast as most of us did in 2008 and into 2009, there's a natural tendency to want to make up the losses quickly. Not gonna happen. There isn't a sane case for a quick bounce back to the market or individual stocks. The healing will be long and slow. To think otherwise is folly.

By that I mean any forward looking statements by analysts or management are almost completely worthless, no matter how pessimistic or optimistic. No one has a handle on this economy. There's no way to tell what will happen in the next 6 months (it never is...but now it's even harder). There's a stimulus package about to be unleashed. That should be good. But consumers are shell shocked, in a total state of fear and panic. That's bad. In fact, there seems to be 10 times more bad news than good at the moment. That puts a pessimistic twist on anything analysts or management says.

However, there are good things happening at certain companies. These are the ones cutting expenses very fast, piling up cash, preparing for the worst but hoping for the best (see the PPG write- up at The Online Investor....it has over $500 million in the bank...it's also raised dividends each year for the last 37). These are the companies that deserve investors' attention. But again, beware of venturing into the future or believing analysts' or managements' statements about next quarter or next year.

Not that the information is misleading. It's just not reliable. Here's one way to make a case for a stock that might be worth your investment dollars. First, look at the dividend. Most likely, it won't stay at the present level (all assumptions are worst case....that the recession lasts at least another year). Even great companies with lots of cash and profits may slash the dividend to preserve cash (and to take advantage of market opportunities such as acquisitions at great prices). Take a look at JPMorgan Chase as a very recent example. It had profits and plenty of capital but decided to cut its dividend by 87% to keep an extra $5 billion a year in the company for other purposes.

When you look at a stock with a good dividend, assume it will get cut in half or more over the next year. Does it still have a decent yield? Take GE as an example. Even though the CEO, Jeff Immelt, declared his defense of the dividend as a priority, the stock isn't trading like most investors believe him. Current yield is 13.6% (with the stock at $9.09 as of this writing). Assume the dividend goes to 62 cents a share, half of its current level. That makes the yield 6.8%, a very attractive return when most fixed income gives less than 4%. Of course, there's higher risk, and the dividend could suffer worse cuts. But Mr. Immelt knows that many investors hold GE just for the dividend. He knows that if it's cut too low, those investors will sell the stock, something that affects him and every other shareholder. He and the board will be reluctant to cut it at all. If they do, it will be to safer levels but not to levels that will cause dumping of the stock unless things are much worse than we know now.

Do this same type of evaluation with all measurements. For example, look at the P/E ratio. If it's very low, double it. Is the stock still attractive? Check the average annual P/E ratio for benchmarks. Will doubling the P/E ratio still put the stock under its average annual P/E? If so, then that's one that might perform well even if earnings disappoint.

The investing world has changed. New parameters are being established as to what a good stock is. The economy continues to deteriorate. No one has a good crystal ball. They're all cloudier than usual. It's time to be very defensive as investors consider which stocks to buy. But they're buying blind. So be careful and be ruthless in your calculations. Assume the worst. Hope for the best. And buy only stocks that seem attractive even if the worst happens.

- Ted Allrich