5 Stock Strategies to Make Money in 2010

BOSTON (TheStreet) -- The stock market's 14% decline from late April through earlier this month rattled investors who expected an economic rebound to power equities.

Nouriel Roubini and Marc Faber, who correctly forecast the 2008 credit meltdown and stock-market crash, are warning of a double-dip recession. Bill Gross, manager of the world's biggest bond fund, is buying Treasuries again as he sees a "new normal" with seven lean years. Investor George Soros just joined the bear camp, calling Europe's sovereign-debt dilemma "act two of the financial crisis."

The reasons to stay out of the stock market are numerous, but so are the incentives to stay in or to get back in. According to investment-research company TrimTabs, individual investors have $1 trillion idling in money-market funds generating almost no interest. Avoiding equities is a misstep. Here are five strategies to follow for the second half of the year.

5. Dollar-Cost Average

Stock-investing isn't an all-or-nothing game. The best way to invest is by purchasing defined amounts at defined intervals, regardless of the stock market's direction. This strategy, known as dollar-cost averaging, ensures that when prices are low, you buy more shares, and when prices are high, you buy fewer. This is a mathematically proven method to generate a low cost-basis if executed with consistency.

Don't allow yourself to be swayed by popular opinion. If you purchased Company X at $10 and the stock falls to $8, the easily swayed skeptic would dump the shares. But if you thought Company X was a "buy" at $10, it's now 20% cheaper. If you're concerned about another bear market, invest in companies that can expand market share in any economy. Despite doomsday predictions, such investments are available today.

One way for individual investors to protect their portfolios is by purchasing an inverse exchange traded fund. ProShares Short S&P 500 ( SH) appreciates as the market drops. It cushions the loss from a stock-market correction, but also limits upside in a rally. Certain stocks, such as discounter Family Dollar Stores ( FDO) and car-parts seller Advance Auto Parts ( AAP), can offer hedges, as well, because their businesses thrive on uncertainty.

According to TrimTabs, individual investors have already added $600 billion to bond funds in 2010. Having been burned twice in the past decade by trend following, first by tech stocks and then by the subprime crisis, Americans are spurning Wall Street by avoiding stocks entirely. The irony is that the unprecedented flow of money into bond funds signals a bubble of prudence. When any population of investors acts in unison, overpricing results.

4. Overweight Large-Caps

The no-brainer investment strategy of 2010 is to purchase large-cap stocks. Famed asset allocator Jeremy Grantham of GMO Capital believes that "for the longer term, the outperformance of U.S. blue-chips compared with the rest of U.S. stocks is nearly certain." Grantham reasons that in a correction, blue-chips will outperform due to relative safety and, in a rally, they will outperform due to relative value.

This strategy is growing in popularity. In this week's Global Data Watch, the economic-research team at JPMorgan ( JPM) detailed the progress of the global economic recovery, providing takeaways for asset classes and regions. Its advice on equities: "underweight banks and small-caps globally, overweight the U.S., India and Mexico." JPMorgan is especially bullish on U.S. large-cap stocks.

The large-cap subset that is most attractive is Dow components. Four that stand out as compelling bargains are Microsoft ( MSFT), Pfizer ( PFE), Merck ( MRK) and Chevron ( CVX). Those stocks sell for PEG ratios, calculated by dividing a price-to-earnings ratio by a company's projected long-term growth rate, of less than 0.5, indicating that each offers a discount of at least 50% to long-term investors.

Another attractive subset is companies that have no debt and cash hoards. In the worst-case scenario of a double-dip recession, such companies are virtually guaranteed survival and have enough money to acquire competitors and expand. Within this category, Cognizant Technology Solutions ( CTSH), Apple ( AAPL) and Google ( GOOG) stand out.

3. Find Idiosyncratic Growth Stories

In any economic environment, there are companies that can achieve organic growth. For example, Chipotle Mexican Grill ( CMG) posted annualized sales growth of 22% and annualized profit growth of 45% during the Great Recession. The poster boy for countercyclical growth is K-Cup distributor Green Mountain Coffee ( GMCR), whose stock has returned 68% a year since 2007.

Currently, semiconductor makers, which offer liquid balance sheets and high growth rates, are attractive. Two that demand consideration are TriQuint Semiconductor ( TQNT) and Art Technology Group ( ARTG), which rank as the highest-rated chip stocks. At least 91% of the analysts covering those companies advise purchasing their shares.

BP ( BP) fallout is causing a paradigm shift in the energy industry. Before the spill, lawmakers were hesitant to punish Big Oil because of the fragility of the economic recovery. But the recent havoc wreaked by BP is likely to bring legislative incentives for natural gas and alternative energy. Natural gas is domestically abundant and safer to extract than crude oil.

One energy company positioned to grow in any environment is Carbo Ceramics ( CRR), maker of ceramic proppants used in hydraulic fracturing, a method of extracting natural gas from shale. Two energy stocks to consider as Gulf plays are Clean Harbors ( CLH), which is booking gains from BP-related clean-up and logistics projects, and Nalco Holding ( NLH), which manufactures COREXIT 9500, a dispersant being used on the oil spill.

2. Mimic Pros' Value Ideas

The best place to cull value ideas is professional portfolios. Famed investors, including Warren Buffett, David Tepper and Seth Klarman, capitalized on the recession by scooping up unloved securities. Because these investors manage more than $100 million, they are required to disclose long positions to the SEC in quarterly filings, known as 13Fs. It's critical to follow the movement of so-called smart money.

Two stock ideas recently derived from hedge-fund activity are Information Services Group ( III) and SuperMedia ( SPMD). Information Services is a micro-cap that is the world's largest researcher on outsourcing. It generates fee revenue by providing companies with custom data and helping them negotiate with outsourcers. This business is reliable because it generates cost savings.

SuperMedia is a stock that could multiply in value within the next year. It publishes yellow pages under the Verizon ( VZ) name and offers a variety of Web-advertising services. Last year, its $9 billion of debt was bought up by opportunistic hedge funds, including Appaloosa Management, Moore Capital and Citadel, which influenced a bankruptcy restructuring.

Hedge funds have transferred their debt into equity in this old-line media company. SuperMedia's stock has fallen 33% in the past month. It remains one of the most compelling bargains in the market. It trades at discounts of more than 90% to peers based on trailing and projected earnings. SuperMedia is priced for extinction, but will persist longer than expected. One solid quarter could ignite the stock.

1. Utilize Dividends

Concern over a double-dip recession has brought dividend stocks back into the spotlight. Yield-seeking investors have piled into mortgage real estate investment trusts, or REITs, which thrive in low-interest-rate environments. Although this trade may still have some upside, betting on Fed decisions is a game with an unpredictable outcome. There are safer high-yield stocks in the market.

Some equities that were dumped in the sell-off offer enormous yields. Telecom stocks such as Partner Communications ( PTNR) and Frontier ( FTR) offer yields of 13%, some of the highest in the market. Although these stocks carry greater-than-average risk, they are worthy of consideration. Partner sells for a price-to-projected earnings ratio of 2.1, an 84% discount to the industry average.

Other dividend stocks worth a look are Dow components, which offer an ideal balance of safety and upside. Verizon and AT&T ( T) currently offer yields of 6.5% and 6.6%, respectively. By comparison, the U.S. 10-year Treasury bond offers a yield of 3.2% and the 30-year offers a yield of 4.1%. Euro-region fear has generated a rally in U.S. government debt this year. However, inflation threatens its longevity.

Other Dow stocks to consider are Merck and Pfizer, which in addition to low earnings multiples, offer yields of 4.2% and 4.7%, respectively. Master limited partnerships, which are often engaged in oil-and-gas storage, also offer fat yields. Sunoco Logistics ( SXL) and TC Pipelines ( TCLP) are two to investigate. MLP distributions are subject to unique taxation rules.

-- Reported by Jake Lynch in Boston.

Readers Also Like:


Follow TheStreet on Twitter and become a fan on Facebook.

More from Markets

All Signs Point to a Nasty Stock Market Correction Later This Year

All Signs Point to a Nasty Stock Market Correction Later This Year

Tesla Gets Major Price Target Slash From JPMorgan After Rough Weekend

Tesla Gets Major Price Target Slash From JPMorgan After Rough Weekend

11 Investing Lessons Jim Cramer Has Learned This Year

11 Investing Lessons Jim Cramer Has Learned This Year

U.S. Stock Futures Edge Higher Ahead of Trade Talks

U.S. Stock Futures Edge Higher Ahead of Trade Talks

PepsiCo Spends $3.2 Billion to Help Save the Planet and Sell More Flavor Pods

PepsiCo Spends $3.2 Billion to Help Save the Planet and Sell More Flavor Pods