A First Peek Into 2009's Market

Investing will still be tough, but here are some picks that pack some upside.
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Christmas is over, and the refrigerator is stocked with enough leftover turkey, ham and pie to last me until the end of the financial crisis. If it doesn't, the leftover hooch form the annual Christmas Eve party should be enough to dull the pain of the economic conditions.

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Now that the holiday shopping season is behind us, it is time to start looking forward to 2009 and what that may bring for investors and traders. As everyone scurries to return the ugly ties and broken electronics they got yesterday, I want to share my thinking for the new year and my best ideas for 2009.

I believe the first quarter will be a tough one for investors. The earnings reports that come in February will be brutal, and I do not believe that is priced into the market yet. All the market analysts surveyed in


a week ago had estimates for

S&P 500

earnings ranging from the low 50s to the mid-60s for 2009. I believe the low end of the range is going to be proven true, and at some point in the first quarter we will see a 6-handle on the 500.

I believe we will also see Treasury yields begin to rise in the quarter as the market begins to absorb the implications of the massive stimulus package that should become law before the end of January. Real estate is going to remain relatively weak in the first half of the year, but I believe there is a good chance we see some signs of stabilization in the second half of the year. It is going to be another tough year, but there will be opportunities for patient investors and astute traders.

My favorite stock for next year is

Darling International

(DAR) - Get Report

. The company is in the most unattractive business imaginable. It collects hides, bones and other unappetizing animal by-products from butchers and meat processors. It also gathers used cooking grease from restaurants around the nation. These lovely leftovers are then turned into usable products including high-protein animal feed, tallow and various industrial oils.

It is not a business I would want to work in, but I am more than happy to invest in it. The returns are spectacular. Sales have been growing at better than 19% annually. The return on equity for the company is over 35%. This may slow down in 2009 as commodity prices remain weak. Analysts are estimating that earnings will fall off to 53 cents a share next year. Even if they are correct, the stock trades at a single-digit price-to-earnings ratio and an enterprise-value-to-EBITDA ratio of less than 3. That is cheap for a company that dominates its space and has no competition except for local operators.

Darling has substantial size and cost advantages and is the market leader in the industry. The basic business is strong and will grow quickly in an economic recovery. As a bonus, there is a potential biofuel payoff in the future as well. At this price, I believe long-term investors have to own the stock.

I like convertible bonds at these levels as well. I talked about this market a few weeks ago, and although it has recovered a little, it remains underpriced. Convertible arbitrage hedge funds have gotten killed in 2008, and they have dumped a lot of bonds on the market. Right now I like playing the market by buying shares in closed-end funds.

I mentioned

Calamos Convertible & High Yield

(CHY) - Get Report


Gabelli Convertible

(GCV) - Get Report

as two of my favorite funds. Both of these have rebounded sharply and no longer trade at a discount to net asset value.


Nicholas Applegate Convertible Fund

(NCV) - Get Report

does trade at an 18% discount to NAV and is the fund I am focusing on right now. The fund is about 33% leveraged but has a very diversified portfolio of convertible securities. Should the Gabelli or Calamos funds trade at a wide enough discount in the future, I will buy more of those as well.

I like the stimulus trade a lot as well. The new administration is planning to spend money to create jobs by rebuilding the nation's infrastructure. It is said to be the largest undertaking since the interstate highway system project in the 1950s. Rebuilding the nation's electric grid, water treatment plants and delivery systems, as well as our highways and bridges, is something that needs to be done anyway, and the government spending just makes the space more attractive.

I like

LB Foster

(FSTR) - Get Report

in this area, particularly if it pulls back a little, as well as

Mueller Water

(MWA) - Get Report

. Industry leaders such as

Foster Wheeler




(FLR) - Get Report

are also a possibility, but I would like to see them pull back toward the lows before I get too excited about them.

That's the first part of what I see and like for 2009. I will have more thoughts and ideas on this next week. I hope everyone is having a great holiday season, and I would like to thank everyone for taking the time to read


. Keep the comments coming, especially if you disagree with me. I like hearing from you all.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider DAR and FSTR to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback;

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