Who Benefits in an Economy and Stock Market Like Today’s?

Benefits in an Economy and Stock MarketIf you’ve been stock picking the last little while, you know it’s tough just to keep your buck, let alone make one. Stock picking is a lot easier when there’s wind at your back. During the technology bubble of the late 1990s, you didn’t even need to do much stock picking; you could have just bought the NASDAQ Composite. Now, in a slow growth environment, making money from the stock market is a lot more difficult.

Stock picking is a lot harder these days, but that doesn’t mean that there aren’t great companies out there benefiting from the big changes taking place in the U.S. economy. Times might be tough at Saks Incorporated (NYSE/SKS), but things are booming at Ross Stores, Inc. (NASDAQ/ROST) and Dollar Tree, Inc. (NASDAQ/DLTR). Thinking about the retail demographic and weak consumer spending, a great investment strategy was to sell the luxury providers and to buy the discount retailers.

The recent stock market performances of Ross Stores and Dollar Tree speak for themselves. Ross Stores was trading just a bit over $20.00 a share in early 2010; now it’s around $70.00. Dollar Tree was trading at $16.00 a share in January 2010; now it’s at $53.00. Just as simple as it was to buy any big, brand-name technology stock in the late 1990s; some of the best stocks in recent history were discount retailers.

Hindsight is always 20/20, but stock picking in any environment can be as simple as asking: who benefits? In any given time period, some industries do much better than others. The key is to be just in front of the trend, before the stocks get into the headlines. As a stock picking investor or speculator, you always want to know which companies benefit from the times you’re living in.

The stock market moves quickly on growth stories in a slow economy, so who benefits from stagnant employment growth, weakening expectations, and a generally lousy outlook? Well, people still need to buy their medicines, benefiting pharmaceutical companies, biotechnology stocks, and Wal-Mart Stores, Inc. (NYSE/WMT). Sales of cigarettes and beer are likely holding up well, meaning Altria Group, Inc. (NYSE/MO) and Anheuser-Bush InBev SA/NV (NYSE/BUD) are benefiting. And people still have to eat food that needs to be shipped, so Kraft Foods Inc. (NASDAQ/KFT) and J.B. Hunt Transport Services, Inc. (NASDAQ/JBHT) benefit. (See “The Blue-chips Hitting New All-time Highs in Spite of Market Correction.”)

When things slow down, everything goes back to basics, and in my view, so should the stock picking strategy. The stock market today isn’t primed for anything except the age of austerity, which is itself a great investment theme. The stock market has already rewarded stores that are working in times like these, and it should continue to do so. Stock picking is just a relative thing; the only thing the stock market cares about is earnings growth.