Stocks which can do well during recession

Market valuations are at record lows and lot of us are looking for cheap stocks.  The real question is what is a cheap stock?  Is the cheap stock something like Yahoo or Google whose prices have fallen because businesses have lowered their advertising budgets or is it something like Microsoft, General Mills or Abbot Labs whose prices have fallen and fundamentals are still strong?  I am inclined to go after stocks like Microsoft, General Mills and Abbot Labs because they strong fundamentals and long term growth stories.  Google also has a long term growth story but for the short term it will  suffer, thus I am not thinking of it as a cheap stock, even though it is 1/3 the value it was just a few months ago.  

How to find cheap stocks?

1. Look for fundamentals.
2. Look for companies which are going to sell even when people don't have jobs.
3. Look for companies which have taken a beating in the current market.

Be Careful

Lot of stocks may appear cheap but not may be actually cheap.  So be careful what you sign up for.

Few weeks ago we talked about Microsoft.  And we re-iterate our bullish stance on Microsoft.  It is really a value investment at this time.  With recent stock buy, an 18% increase in dividend which now stands at 2%, and AAA rating from S&P - Microsoft is a great play for both short term and long term investors.  Sure there is a lot of buzz about new GPhone but Microsoft's Windows Mobile Platform is already installed on millions of smartphones and widely accepted by corporations.  It will take some time for the GPhone to catch up as all the toy owners already own iPhone.  Microsoft is slowly making inroads into the online advertising world too as they will have more than $3 billion in revenue adding a decent sum to the huge $67 billion which they are expected to do this year.  We all have heard and now seen during this financial crisis that Cash is King and $21 billion is not a small sum to have in the bank.  The impact  on business in general is expected to be minimal due to the financial crisis.  It really seems like that Balmer is keen on pushing up the stock price and he is actively working on this.  Rest you as an investor should figure out if what we are  saying here has anything valuable in it?

Financial markets and banks have been going through a turmoil due to misdeeds in the credit markets.  Government has been trying very hard to bail out top banks.  The stock market has suffered tremendously due to the credit crisis.  While the common sense tells one to stay out of the market, investment sense is telling the otherwise.  This gets even bett­er for the financial stocks.  This week's Barron's issue thinks that stock price of AIG will tank while Bank of America may go either way.  The markets have already rallied due to the $700 Billion rescue plan by the government and a short selling ban by SEC.  But something else has happened this Sunday (September 21st, 2009).  The Federal Reserve said Sunday it has approved a request by the country's last two major investment banks -- Goldman Sachs and Morgan Stanley -- to change their status to bank holding companies from investment banks.  The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the ­resources of both institutions.  But what Fed has stated but I will, that this is going  to initiate a consolidation in the banking industry.   Smaller bank will merge to compute with the two new competitors.  While both GS and MS will acquire several beaten down yet healthy or small banks to quickly gain the market share.  While, individual financial stocks may still be risky but ETFs such as XLF definitely have a room to run.  In the long term, the banking system of world's largest economy cannot simply crumble and most of the negativity is already accounted for in banking stocks.  If you think that you can invest like Buffett or Peter Lynch then now is the time for you to shine.   

If you are a value investor, then you know what Microsoft is all about.  It is a company flushed with 24 Billion in cash, No debt, a low forward PE of 13, 36% in operating margins and a 45% return on equity.  Microsoft also happened to be in the business of real estate because they own most of the real estate they have their offices in and they are adding new properties everyday.  Sure there is a negativity around Microsoft facing Google as a big challenge.  But anyone with a good business sense knows that companies like Microsoft don't die that easily and Microsoft has the history of being able to figuring it out and doing it better than anyone else.  Stock is roughly 25% below its recent peak of $37 / share.  With heavy growth in emerging markets, it should rise.
As far as the short term aspect is concerned, well earnings are coming next month and they just turned down yahoo merger..  Don't you think it will spike.