Friday, December 12, 2008

Investors Square Your Shoulders

Economic developments in the last several weeks suggest deflation would be an appropriate topic for this web log. Those falling prices….contraction in demand….pull back in lending….the signs are accumulating.

Socialization of the economy could be another topic. Just look at that historic Senate vote on December 11th turning down the automakers in their plea for short-term financial support.

Of course, it was just politics. President Bush had already signaled his willingness to direct some TARP monies to the automakers, particularly Ford (F: NYSE) and Chrysler [subsidiary of Daimler Chrysler (DAI: NYSE)], which apparently cannot make payroll even to the end of the month. The Republican Senators were thus free to practice partisan politics, pitting capital against labor, knowing the President will step in and the Senate will not be blamed for the collapse of an entire industry.

Could we have had a better demonstration of how inept politicians can be in resolving real world problems? Personally I would be ashamed to return home after such performance. Not that I am that disappointed in seeing the car men go home empty handed. The American taxpayers recently handed BILLIONS over to the bankers so they could make loans. Let the Big Three go to the banks for short-term loans.

Negotiated agreements are better forged in the board room anyway where the arguments are in dollars and cents not politics. After all how can the labor unions agree to wage cuts out in the public when the proposition is posed as it was by the U.S. Senate in a political rather than business context? Bankers are much better at sorting out wage and supply agreements.

However, I for one am tired of waxing profound. It is time for investors to square their shoulders and start INVESTING. This requires some change in tactics to fit the times. No more trolling for momentum plays. Longer investment horizons will be required. A greater emphasis on cash flow analysis - a practice which has always been central to the stock selection at Crystal Equity Research.

Where does the bravest of the brave investors look for new ideas? First, we point to our previous posts on dividend plays. Second, look to small-cap technology companies. In the year the bubble burst, Google, Inc. (GOOG: Nasdaq) recorded $19.1 million in sales in 2000. During the three years following when the country was falling into and then climbing back out of a recession, Google kept marching along, reaching $1.5 billion in sales in 2003.

I believe more small companies are percolating along, finding ways to get innovative products and services into the market. The patient investor with a time horizon beyond the quarter cycle will be rewarded for his or her diligence and patience.

In the next few posts we will look at a number of companies with new technologies - some disruptive to existing ways of doing business. We are looking at alternative energy, resource management, recycling and efficiency. Some are fledgling companies and some are established operations with the foresight to seek sustainability in an energy-constrained world.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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