How to Uncover the No-Quit in Not-So-Quiet Companies

As I read the Financial Times on the flight from Baltimore to West Palm last week, my worst fears were confirmed. The market meltdown is truly global. And several countries – including Turkey, Iceland, and Argentina – can sell their bonds to investors only by paying out double-digit interest rates to make up for the added risk of investing in them. Amazingly, these countries – plus Pakistan, the Ukraine, and Kazakhstan – have an over 50 percent chance of going bankrupt (according to how much investors pay for insurance on the bonds they hold from them).

The only market I could find that is going up? The Baghdad stock exchange. Do you want to invest in Iraq? Hmph. Didn’t think so.

Formerly soaring markets like China, Brazil, and Russia are down the most. But even strong economies like Korea, Taiwan, and Canada are tanking.

If I ran a hedge fund, I’d be shorting Turkey, the Ukraine, and a couple of other countries that I think are in big trouble – like Hungary and Latvia.

Hedge funds have a lot more options on how to invest globally than you and I do, yet this has been a terrible couple of months for hedge funds too – the worst on record, as a matter of fact. Hedge funds, it seems, took huge losses as oil and commodities dropped, and got caught betting against banks when they rallied after the Freddie and Fannie bailout.

Funds and institutional investors must be in big trouble, because they’re getting out of gold at a time when the global economy is falling apart – and in times of panic, investors usually rush to buy gold. It can only mean one thing. They’re selling gold to raise money to fund margin calls they’re getting on losing positions.

Surely, if the smart people running hedge funds are losing money, what chance do you have?

People are resigned to losses. Many have come to me with the question, “How can I protect my retirement account?” Nobody has recently asked me how they can profit from their investments – as if that’s too much too ask of the market. (Or perhaps too much to ask of me?)

Listen, your losses are a done deal. I am really sorry. I’m sure you worked hard to save. You depended on being able to continue to grow your savings. And in the past couple of months, you’ve lost critical ground. It’s the worst feeling in the world. I wouldn’t wish it upon anyone. But now I want you to do something investors have the hardest time doing. I want you to stay calm and not panic.

On the ride home from the airport the other night, my driver was telling me what happened to his and his wife’s savings six years ago, when the Nasdaq lost nearly half its value.

“We had both lost a lot of money. My wife took the rest of hers out and began tinkering with her investments. She did the best she could, but within a half-year it was all gone. I left my money in there. I wouldn’t have known what to do with it if I had taken it out. What do I know? I’m no expert when it comes to investing. Five years later, my money had doubled. This time around, I’m not touching anything. And neither is my wife.”

That’s not a bad approach. You’d be selling when prices are very low. And while you may avoid another 10-20 percent dip as the market searches for a bottom, it’s likely you’d also miss the initial swing up – which could be as fast and as furious as the market’s recent drop was.

The one thing you should remember about the market’s fall from grace is this: It’s forcing down all companies – the good, bad, and ugly. By “good,” I mean those companies with a track record of growing profits… being judiciously opportunistic with their cash… and with products that are sellable (without seeing their margins disappear) even when people have less money in their pockets.

Let’s start with what’s not sellable: commodities, materials, all forms of energy (including alternative energy), houses, autos, and big-ticket items.

Now here’s what is sellable: food, staples, beverages, tobacco, medical products, and services.

Then there’s another category: what we don’t know is sellable. Case in point is cellphones. This is the first recession we’ve had since cellphones have become the constant companions of practically everybody. Will people upgrade less often? Use fewer minutes? We don’t know.

Clothes, we do know. People will buy less and will buy cheaper. And that goes for things like jewelry, tools, and footwear.

That, however, does not completely explain why some stores – like Wal-Mart – are doing well and others – like Target – aren’t.

Or why McDonald’s is doing better than Wendy’s.

Or why Coke continues to grow and Pepsi continues to flounder.

These are companies in the same sectors selling the same kinds of products to the same people.

Does Coke taste that much better than Pepsi? You don’t have to answer that. All you have to do is pay attention to the numbers and the words.

Coke: “Our brands and our business were built for times like these. We are winning in the marketplace.”

Pepsi is cutting jobs and closing factories: “This will enable our competitiveness and give us breathing room to respond. It is no news to you the economy is turbulent and there are uncertainties and volatility in every part of the environment.”

Gee. What does this tell you about why Coke is doing well… and why Pepsi is reeling from the global recession?

In the next few weeks, hundreds of beaten-down companies will be reporting their third-quarter results. They will have a chance to step up and tell us why they are facing the future with confidence. If they’re not, you will hear it in their words or see it in the profits they report and in the guidance they give (for future performance).

Some CEOs will try to put lipstick on some ugly numbers. Don’t fall for it. If there’s a disconnect between the numbers they give and the words they say, believe the numbers and ignore the words.

Coke’s numbers were pretty good. Its profits rose 14 percent despite poor demand in the U.S. They have practically no debt. Their margins are over 25 percent. All these numbers beat Pepsi’s.

Unfortunately, most companies will be practicing the fine art of spin control to disguise some pretty disgusting numbers. There won’t be many companies like Coke – with a strong record of growth, little debt/good cash position, and products that people continue to buy – that will also be reporting impressive profits.

The few there are have been dying to tell their story to investors, the same investors who have been throwing out the baby with the bathwater. Now they’re getting their chance to rise above the crowd.

[Ed. Note: You could be one of the few investors who make money in this terrible market. Besides paying attention to fundamentals, you can keep an eye on one of the “red flags” that many companies are displaying.]