Finding Stock Market Winners in 2009

How to climb out of equities' year from hell? BusinessWeek asks professional investors about their strategies for the coming year

Get ready for an understatement: This has been a tough year for stock pickers.

With just a week left in 2008, only 16 stocks in the broad Standard &Poor's 500-stock index, or 3.2% of the index, have offered investors a positive return.

But there's always next year. Despite market conditions that have disproven prediction after prediction, BusinessWeek asked fund managers for stocks they believe could help investors regroup after the past year's losses and how they go about finding these gems at a time of unprecedented economic and financial turmoil. See those picks in the attached slide show.

Although some found small reasons to be optimistic about 2009, few believe the new year will be an easy one for the stock market. "A wave of bankruptcies" will wipe out shareholders' equity stakes in a large number of companies, says Michael Alpert of J. & W. Seligman When it comes to corporate earnings, Andrew Bischel of SKBA Capital Management advises not to expect any good news from the earnings front anytime in the near term.

"We know there is going to be a lot more economic bad news coming," says Russell Croft, portfolio manager of the Croft Value Fund (CLVFX).

Tapped Out Consumers

Of biggest concern may be the U.S. consumer. With Americans buried under debt and unemployment rising, fund managers avoided picking stocks that rely on consumers who "truly are tapped out," according to Scott Armiger of Christiana Bank & Trust Co..

So in such a gloomy environment, where are the winning stocks?

One answer is companies that can actually benefit from the bad times. Alpert owns FTI Consulting (FCN), which earns money as a consultant on corporate bankruptcies.

Then there are companies that may not grow in 2009's tough conditions, but at least can take advantage of their rivals' weakness. "The strong will get stronger at the expense of the weak, either through acquisition or market share growth," says Peter Sorrentino of the Huntington Real Strategies Fund (HRSAX).

Market Overreaction

Some fund managers also believe that even if 2009 will be a hard year, investors can profit from the market's excesses in 2008. Energy stocks, for example, were whipsawed in 2008 by a runup in oil prices to above $140 per barrel, followed by a sharp drop to below $40 per barrel. Oil's cheap price has punished energy stocks, but several managers said the market is overreacting. "We didn't think $145 a barrel made any sense at all," SKBA's Bischel says. "Nor do we think $40 a barrel makes any sense."

Coal stocks have been hurt not just by the economic slowdown but worries about new government regulations. Still, Robert Auer of the Auer Growth Fund (AUERX) expects some coal companies to boost earnings. Coal is needed to generate electricity around the world, and "even during recessions we still generate and use more electricity," he says.

The past year's broad market selloff has fund managers hunting for "babies that have been thrown out with the bathwater," says Croft. He bought Monsanto (MON), a "quality company we've been watching a while but [was previously] too expensive."

In 2008 "stocks have just been pummeled," says J. & W. Seligman's Alpert. The market is "treating them like we're going into a depression." If the economy can just avoid a depression and battle through a serious recession instead, many stocks could recover.

Which Will Recover First?

Some fund managers do believe there are reasons to be optimistic about 2009. Trends exist that could boost stock values and start an economic recovery. "The challenge today is identifying which areas are going to be experiencing recovery first," says Rob Lutts, chief investment officer at Cabot Money Management.

Several fund managers cited the efforts by governments in the U.S., Europe, and Asia to stimulate the economy with spending on infrastructure. They recommended industrial stocks that had been helped by the global building boom, then punished severely by the global slowdown.

A similar trend is possible in the financial sector, where governments are doing everything they can to pump liquidity into the system and end the credit crisis. That's why some fund managers, after a year or more of avoiding financial stocks, said they were dipping a toe into the sector.

Despite those hopes, this is a risky time to be buying stocks. The next year could be a rough one for investors, even if it turns out to be better than the dismal 2008.

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