Tuesday, February 17, 2009

Sharp Turn Ahead

As gloomy as the pundits and politicians portray our present economic mess, recovery is still possible. Yet a new economic paradigm is more likely than not to emerge at the other side of the recession. For example, fossil fuel is on the way out and renewable fuels are in. Private jets are out but shared executive air service may flourish. Corporate junkets are out but virtual training sessions could expand. Coffee selling at five dollars a cup and handbags that sell for the equivalent of a car payment may no longer be supported by newly frugal consumers.

What companies will be successful when the credit markets are fixed and the economy resumes growth? Which have high quality products and services that will be marketable in the new economy?

This presents quite a conundrum for investors holding stocks in “old economy” companies. If management is not skilled enough to navigate what is shaping up to be a sharp turn in the road ahead, it is not likely the stock will recover from current lows.

Old-school companies are not necessarily down and out in the new “lean/green” economy that we believe is in the offing. Many offer products and services vital to future growth as the U.S. and every other economy around the world attempts recovery from the current recession. Nor are new-age operations automatically worthy of our continued patience. Many emerging companies lack the financial resources and skilled management teams to survive a period of weak demand and limited access to capital that is evident today. Their stocks will likely reflect that weakness.

We chose each company in the Crystal Equity Research coverage group after confirming that it can operate a “new economy.” We also think they have the capital and human resources to stay on the path.

BOOM - Proprietary metals
CDTI - Fuel emissions solutions
DAR - Recycling and renewable diesel
ECOL - Hazardous waste disposal
EHTH - Efficient, on-line health insurance distribution
HGRD - Consumer health care information portal
PFWD - Drug development automation solutions

The author of the Small Cap Strategist web log has a beneficial interest in ECOL and CDTI. Crystal Equity Research has a buy rating on CDTI, DAR, EHTH, HGRD and PFWD and hold ratings on ECOL and BOOM.

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