My target list of stocks

In putting together my list of stocks, I followed a few basic threads

1. Assume a US recession (slowdown in consumer spending, construction and associated services and materials)
2. Assume continued global strength
3. Look for supply constrained sectors and find growth
4. Assume Russia and China will launch an acquisition initiative to get technology and raw materials


Sectors to Avoid
Capital Goods - This is a very polarized space. Agricultural demand is soaring, because of ethanol boosters and general problems of insufficient food and inefficient farming. Conversely, US construction & construction raw materials are nosediving. I would be shorting construction services and Mobile Homes/RVs. RV makers have had the snot beat out of them this year, and I don't think it's going to stop. They get hit with a triple whammy: expensive gas, tougher lending, and tighter consumer spending.

Consumer Cyclical - This is the #1 sector to avoid. Consumers will still buy clothes, but no more new trucks for a while. Same with tools. I would short:
Appliance & Tool
Auto & Truck Manufacturers
Auto & Truck Parts - May be ok if people do more fix-it-up instead of buy a new car
Furniture & Fixtures - They may make sales targets but only by bombing margins. For example, 0% financing for 2 or 3 years
Tires

Consumer Non-Cyclical - The Coca Cola's of the world. These folks are getting squeezed by rising material costs. People will still continue to buy, but earnings may stagger a bit. I don't think that they will have a lot of success passing costs on. Recreation and entertainment will actually do well as folks look closer to home for cheaper recreation.

Financial - Do not get near it

Services - Services never do well in a recession. Exceptions exist, like casinos. Others are hard to predict, like real estate management: will rents go up or down if folks are forced out of their houses?

Sectors to target

Basic Materials - I think this still has legs, but nowhere near the boom that it had. Certain categories like precious metals, iron, & mining look strong. These are really China oriented (Coal and iron are being shipped to China in record volumes)

Energy - Buy big. Coal continues to be a steady performer. I prefer services and Equipment over the actual oil producers.

Healthcare - Like consumer non-cyclicals, demand will continue here. I don't like drug makers unless they are generic drug makers. Healthcare may also suffer if unemployment increases. On the other hand, cost management and access to cheaper generic drugs may help...eventually. Bottom line, where does the growth come from - simply raising prices? Will that work under a Democratic White House? Better to stick with medical equipment and supplies.

Transportation - Any exposure to higher fuel costs is already baked in. Some problem areas like US exposure to Mexican trucking. But international shipping and transportation is hot. Especially in China - ZNH has settled down a bit after going ballistic.



The recent bust and run-up was very helpful. It showed me which of my target stocks had strong underlying support.
The Dow peaked at ~14,200 in early October and it sank to 12,700 in late November. So I wanted stocks that withstood that huge drop.


This is what I decided are my favorite stocks to buy in:

AGRICULTURE - US farmers are making a lot of money on crops. The crops are going to other countries. Farmers need fertilizer and equipment.
AGU, POT, TRA, MOS, or CF
AG

OIL Services & Equipment
IO - They don't have enough momentum. Time to take our money and run this quarter
FWLT (although MDR is looking cheap in comparison)
ATW, RIG, NE or DO

CELL PHONE
VIP
MICC

OTHER
MVL - I really like their story
PCP
TRID - yep
WFR
DSX or DRYS

Now, timing. The question in my mind for the past month was: is this really a rally or another stop on the way down?

To buy or not to buy?

Don't buy: Look at the 6 month chart: the low in November is much lower than the previous low in August. That suggests much greater volatility and potential downside. Also, the market is pricing in a Fed 0.5% cut already. It may get excited and then fall back again.

Buy now: At the same time, the rally is much stronger. I wanted to buy back in: I am a strong believer in rallies during the last month of every quarter. The funds are like gamblers standing around the tables in Vegas: after a while, they have to make a bet. Look at September: huge rally going into earnings reporting season. Same with June going into the July earnings reporting season.

Also, much of the market collapse is technical - the result of a liquidity squeeze.

As you can see, I am of two minds. I think the thing to do is to assume that my target stocks will beat earnings expectations and not to pay to omuch attention to short term swings.