Bear markets are the perfect time to add great stocks to your portfolio at discounted valuations. Since we are currently in a pretty bad bear market, it’s the perfect time to share how I pick great stocks that are trading at a great value.

First Look for Stocks with the Ability to Outperform

The first thing I look for in a stock is the company’s ability to outperform the market and it’s peers. In a bear market it’s often hard to find companies that will grow, but losing less then the market is not a bad thing plus I’m more concerned about the recovery. I also look for a company that is innovative and efficient because those traits often lead to a distinct advantage. The industry that a company is in also needs to be strong and have the ability to grow because a great stock in a struggling industry won’t get you very far. How well the company is positioned and will do is a judgment call you’ll have to make after doing research on the company and industry.

Second Check the PE Ratio and PE Chart

Once you have your list of companies with the ability to outperforming the market, you’ll need to see how expensive the stock is by looking at the PE ratio and PE chart. As we have talked about in a previous post, PE ratios and PE charts are a very important tool in picking stocks that have a high probability of outperforming the stock market. Picking stocks with low PE ratios are a great way to find value and make money, but you also have to check the PE chart to ensure that you are getting a deal. Just because a company has a low PE ratio doesn’t mean that it’s a low PE ratio for the historical trading of the stock. The magic PE number for a particular stock is relevant to what prices that stock had traded at in the past and thus it’s PE chart. You can read more about this in an earlier post about PE ratios and PE charts.

Last Look for Strong Estimated Earnings

Besides a low PE number you also have to pick stocks with strong future earnings potential. It’s not very easy to estimate the future earnings of a company so it’s good to look at what professional analysts think. I usually visit MSN money central to get a feel for what analysts are expecting future earnings to be. Analysts are pretty smart people but as they are predicting the future, they can often be wrong. There are times that their estimates might seem off or you might have a different view. When my observations are off from the analyst estimates, I’ll often follow my instinct and go against the average analyst numbers. I would only recommend doing that if you feel that your observations are more often right then wrong.


These steps won’t protect you from a bear market but they will help you find great deals on stocks so that when the stock market pulls out of the bear market and starts to rally again you should outperform the market. Check out what the current Market Flavor portfolio looks like as we have a lot of stocks that fit all three of these criteria. Also be sure to sign up for updated from this blog on the right side of the page so you’ll know when we make changes to the portfolio.

Tags:   Stock Picks  

Posted on October 20, 2008 7:55 PM | Digg | del.icio.us