This from Investment U:

Forget the grim news that Alcoa (NYSE:AA) is slashing costs and cutting 13% of its workforce. We all know times are tough. But the market’s a forward-looking beast. And right now, it’s doing exactly what I predicted on November 19. It’s favoring small caps over large caps.

In December the little guys put up big numbers – a 5.8% gain versus a mere 1.1% uptick for the large guys, based on the Russell 2000 and S&P 500 indexes.

Before I get to my favorite ways to screen and play this emerging small-cap rally, let me first address my critics.

My last column failed to convince some of you. Others thought I simply skimped on the proof. Or more specifically, that I failed to tell you why NOW is the right time to buy small caps.

As they put it, “We all know small caps lead the markets out of a recession. But what makes you so convinced we’re on the way out?”

As my college physics professor liked to say before each lecture, “Prepare to be enlightened.”

Why It’s Prime for Small-Cap Investing

Let me first disclose, I’m not a market timer. I don’t look for single infallible data points to signal my buys or sells. Instead I track trends (both long and short term). And there’s no denying the trend at the National Bureau of Economic Research – the committee responsible for officially uttering the economic curse word, recession.

You see, these guys – albeit a collection of the most educated and intelligent economists – have a knack for being late. By the time they make the call, the recession is usually close to over. Or in the case of the last two recessions (1990 and 2001), over completely.

This time will be no exception. The government’s about to dope up the economy on stimulus packages. In other words, plenty of economic growth is in the works. If you’re skeptical spending massive amounts of money we don’t have will do the trick, I understand. But just realize, something will prove to be the catalyst for a turnaround. And the numbers belie that something will materialize very soon:

• Since 1900, the average recession lasted 14.4 months.
• And since World War II, only two recessions (1973 and 1981) lasted longer than 15 months.
• So strictly by the numbers – based on a start date of December 2007 for the current recession – odds are this recession will be history by early spring.

You could argue, if you dare utter the words that “this time will be different,” that we’ve never experienced such a financial collapse. And the averages could be meaningless.

Fair enough. But again, I challenge you to recall any other period when so much stimulus (in the form of obscenely low interest rates, tax breaks and massive government spending) poured into the markets with no impact.

It doesn’t exist.

Ultimately, we’re at the tail end of this recession. And we know that means a small-cap rally is next. If you really want to press your luck, you could wait to until the end of the first quarter to consider small caps stocks. But I wouldn’t.

Being late could mean missing out on serious profits. Whenever you decide to jump in, here’s how I would go about finding the best opportunities…

Small-Cap Investing: The Big 3 Screening Criteria

In this market, our primary concern needs to be credit. Companies need it to operate and grow. Small caps are no exception.

That’s why the first thing I screen for is small companies with no or little debt (debt-to-equity ratios below 0.3). This alone will narrow down your choices significantly. But it will also reduce your risk.

Next, screen for companies with a sustainable competitive advantage. It could be revolutionary products, an insurmountable first-mover advantage, or extremely high barriers to entry. Anything that protects the underlying business from competition and enables the company to do the most important thing of all – increase earnings by at least 30%.

Yes, such companies do exist. And a market panic can only hold them back so long. Eventually, share prices will follow earnings. If you stick to the fastest-growing companies, I guarantee you’ll be holding onto the fastest-growing stocks, too.

Beyond these criteria, look for companies within three years of an initial public offering. Wall Street tends to overlook many of these firms. Plus, smaller and/or newer companies have more room to grow.

2 Small Caps Stock Investments to Bank On

In November, I singled out Genoptix, Inc. (Nasdaq:GXDX) and American Pubic Education, Inc. (Nasdaq:APEI). I still consider both strong buys. I’d also add these two small caps to the list:

E-House Holdings (NYSE:EJ).

Debt-to-equity checks in at 0.07. It could easily be zero as the company has enough cash to pay off debt almost six times over. E-House possesses an insurmountable first-mover advantage in the real estate agency services industry, with 1,800 professionals in offices in more than 20 cities. And its earnings have increased 62%.

I know. It’s a real-estate stock. And a Chinese stock, to boot. But that doesn’t matter. Nothing’s going to put a stop to the Chinese wealth creation machine. And the next big ticket item (after a television, refrigerator, air conditioning and a car) for the Chinese middle class is a home. If you have any doubt, consider E-House increased sales 63% in the first nine months of 2008. Despite such impressive fundamentals, shares trade for just 15 times forward earnings. But they’re on the move, up 51% since December 1, 2008.

American CareSource Holdings, Inc. (Nasdaq:ANCI)

Debt-to-equity checks in at zero. ANCI has just $16,000 in outstanding debt and over $8 million in cash. The company’s competitive advantage comes from its size and position as the first ancillary benefits management company. ANCI helps companies control health care costs by offering cost effective alternatives to physician and hospital-based services through its network of 2,400 providers. It also uses a proprietary software platform to help clients identify additional areas for cost improvement. Growth is off the charts with revenues up 127% and earnings quadrupling in the most recent quarter.

It goes without saying that controlling health care costs is a big concern. For the government and individual business owners alike. As a result, demand for ANCI’s services will only increase. And just because you probably never heard of the ancillary health care market, don’t think it’s small. At $574 billion it accounts for 30% of total national health expenditures. Given the current fascination with cutting costs, that percentage will only increase, leaving endless opportunities to grow for ANCI.

Source: Small-Cap Investing: How to Play The Emerging Small-Cap Rally

This from Smart Profits Report

A Healthcare Haven

It stands to reason that the sectors and companies that traditionally fare better during economic recessions are those that garner essential repeat business.

As my colleague Marc Lichtenfeld has pointed out many times here before, that includes the healthcare and biotech sectors. And far from procrastinating, Marc just issued his “Five Predictions For The Healthcare Sector In 2009″ for Xcelerated Profits Report subscribers in the January issue. If you’re not a subscriber, you should be! You can get more information on that here.

No matter what happens with the broader economy, people will still get sick and will still need drugs and medicines. With a growing population and people living longer, the long-term prospects for healthcare remain excellent.

But in a poor economic and investing climate, your best bet is to stick with the powerhouse pharmaceutical companies like Johnson & Johnson (NYSE:JNJ) and Proctor & Gamble (NYSE:PG), which are masters of the “razor-and-blade model” (basically, once a consumer buys a razor from the company, he/she needs to keep buying blades for it, thus generating repeat business). In the biotech world, look at big boys like Genentech (NYSE:DNA) and Gilead Sciences (Nasdaq:GILD).

Food, Glorious Food (And A Bunch Of Other Stuff, Too)

If people regularly require medicines and drugs, they need everyday essentials like food and drink even more. And while the retail sector is struggling overall, there are some companies that should fare well as the economy stumbles and consumers cut back.

You got it… discount retailers. Okay, so I know pretty much all retailers are slashing prices these days in a desperate bid to get folks to spend their hard-earned dough. But the ones who already boast a discount model as their bread-and-butter are better prepared. That includes sector bellwether Wal-Mart (NYSE:WMT), plus bulk goods stores like Costco (Nasdaq:COST) and BJ’s Wholesale Club (NYSE:BJ), which also offer a huge range of items at bargain-basement prices.

Switch On And Profit

Another favorite safe haven sector during economic downturns is utilities. Again, the companies within it produce goods that consumers can’t live without: Energy and power such as electricity.

The Dow Jones Utility Average (^DJU) includes major power producers like American Electric Power Company (NYSE:AEP), Exelon Corporation (NYSE:EXC), Consolidated Edison (NYSE:ED), and Southern Company (NYSE:SO), which generate reliable, repeat revenues and also pay hefty dividends.

And speaking of dividends, you could head to tiny Luxembourg this New Year and pick up a beefy one with steelmaker Arcelor-Mittal (NYSE:MT). A Business Week article cites the company as a potential turnaround performer next year, stating:
“Most analysts think it’s unlikely that Old World bourses will rally before the second half of 2009. Still, investors with more appetite for risk – and a willingness to pore over balance sheets – can find some good values even in cyclical businesses such as manufacturing. Bleak earnings outlooks have already been factored into many share prices.”

And having endured a brutal 2008, slumping from $78 to $24 a share, Arcelor-Mittal has announced widespread cost-cutting measures that includes shedding 9,000 jobs in a bid to save $1 billion. Its forward Price-to-Earnings ratio is just 2 and with Obama’s infrastructure revolution set to get underway in 2009, the global steel giant could be well poised to profit from it.

The “No-Hype” ‘09

As 2008 thankfully disappears, it will be more important than ever to stick to the tried-and-tested investing principles in 2009.

Right off the bat, that includes being very watchful for hype. In a down market, some companies will undoubtedly be keen to gloss over or downplay any bad news, for fear of causing harm to their stock prices in an already weak market.

Make sure the companies you invest in boast strong, honest management teams, with minimal spin and no excuses. It sounds simple, but look for companies with competitive advantages and which continue to grow revenues and earnings and even pay dividends as a key sign that they’re probably still in good shape.

Remember that with recession hanging over the economy – one projected to be the worst and longest since 1982 – upward momentum could be tough to achieve. Investors are still very skeptical and, among other things, are likely waiting for GDP growth to improve (or at least not be revised lower)… for corporate earnings to beef up… for job losses to ease… for Obama’s tax cuts… and to see what kind of effect Obama’s huge economic stimulus package proposal has. It will arguably take something around $750 billion to provoke much sustained, positive reaction.

So be very wary about bold statements, proclaiming that we’ve seen a bottom in the stock market. We probably haven’t yet. Meantime, consider some of the companies mentioned above and/or those that pay dividends.

Source: Three “Safe Haven” Sectors For Your 2009 Portfolio

Yesterday we got confirmation that the U.S. economy contracted by 0.5% in the third quarter. And most economists expect the downturn to accelerate, with GDP checking in as low as negative 6% in the fourth quarter. Here’s why I’m not concerned…

A more important trend is emerging. Remember, on November 19 I told you to consider going big, by going small with small caps. Well, the markets didn’t leave much time for preparation.

In that short span, small caps jumped 6.38%, almost tripling the returns of large caps, based on the Russell 2000 and Russell 3000 indexes. Of course, it’s too early to declare a full-blown rally. But we shouldn’t be ignorant to the subtle shifts in market leadership.

Remember, the market’s a forward-looking beast. And that means even in the darkest hours we need to be thinking about the next bull market… and positioning ourselves to profit.

The more I research and monitor the markets, the more convinced I become that the time for small cap stocks is upon us. In the next two columns, I’ll do my best to convince you of the same.

Today, I’ll focus on the why. Next week, I’ll show you how to screen for the most potent opportunities, as well as provide a few specific recommendations.

Before we get to it…

Making Sure You’re Ready To Buy Small Cap Stocks

Before I lay out the case for small cap stocks, we need to make sure you’re ready to buy. After a brutal 2008, I fear many of you may have packed it in for the year. But sitting cash heavy right now is a big mistake…

First of all, two of the fastest-rising bull markets occurred in the 1930s. So don’t kid yourself. Times are tough. The economy’s in the tank. But this market, just like during the Great Depression, could turn on a dime, too.

That means if you’re not positioned ahead of time, you’re certain to miss out.

As Minneapolis investment research firm The Leuthold Group reveals, in the first year of every new bull market since 1900, the Dow jumped an average of 41%. Keep in mind, the average total bull market gain over the same period was 84%. In other words, bull markets are heavily front-loaded.

And Standard and Poor’s agrees. They estimate most investors make back 82% of their bear market losses in the first year of a bull market.

Bottom line – being late to the next bull market comes with a big price tag. And I don’t want you to pay it.

Why 2009 Will Be a Small-Cap Stock World After All

Now that you’re primed, let me tell you why jumping into the deep-end and buying traditionally riskier small cap stocks is actually the smartest bet right now. I’ll let the data, not my own personal convictions, do most of the talking…

• Coming out of recessions, nothing beats small caps. Last month, the National Bureau of Economic Research (NBER) made it official. The U.S. economy is in a recession. No matter when we make the calculation (after one month, six months, one year, even three years) small cap stocks trounce their larger brethren coming out of slowdowns, according to the data crunchers at Old Mutual and Morningstar.

• Even if the economy doesn’t recover in 2009, small cap stocks should shine. The latest from Citigroup Global Markets indicates small caps could care less about the underlying economy. Even in years of flat or negative GDP growth (up to 2%), small caps return an average of 44%.
• One month can make a difference. Based on the 10 worst years for stocks since 1927, small caps jumped 18.17% in January alone. Meanwhile, large caps barely showed up for the much-heralded January effect. They only muster a 3.1% gain, on average, according to Cambria investments. I don’t know about you, but the prospect of one-month double-digit gains, especially after this year’s drubbing, excites me. The fact that they could come just weeks from now is even more tempting.

In the end, only time will tell if a small-cap rally is truly underway. By then it will be too late. I suggest you heed the data that keeps piling up in favor of small caps. I’m not saying you should invest in nothing but such stocks. But you should at least consider increasing your exposure.

Here’s one last data point to chew on: Since 1926, Morgan Stanley found large caps return more, on average, when they trail small caps. When large caps lead the way they only return 7% per year on average. When small caps shine, large caps return 13% per year, on average.

Put more plainly, a small-cap rally is a win-win. Their strength brings our large-cap holdings along for the ride, too.

Source: Small-Cap Stocks: The Most Important Trend Headed Into 2009

Yum! Brands Inc. (NYSE:YUM) expects another year of double-digit profit growth.

For nearly everyone else, 2009 won’t be just “another year.” Nearly every economist expects the first half of the New Year to bring more of the same, a deepening global financial crisis that’ll throw an even bigger, wetter blanket on economic growth than it did this year.

Indeed, even more than in 2008, next year will be a real-life case study of the survival of the fittest. And Yum’s certainly fit for the fight.

“Our industry is better-positioned in times like this,” Yum Chief Executive Officer David C. Novak told The Wall Street Journal. “We’re better-positioned than most other categories and industries.”

Already, we’re seeing companies slash work forces, trim (or abolish) dividends, and lock the safe that stores their spending money, sell off holdings or even shut down completely.

Yum’s not immune from the downturn. It, too, is cutting $60 million in operating costs from its U.S. business. It’s also putting a hold on buying back shares next year to preserve cash.

But unlike most, Yum hasn’t red-lighted its 2009 expansion plans – it’s still planning to build as many as 1,400 restaurants in international markets. About 500 of those new stores will be in China. That’s part of the reason the overall company is projecting at least 10% profit growth in 2009.

More broadly, Yum is expanding in the world’s fastest-growing economies and is making its menu part and parcel of every foreign country in which it operates. Two factors have imbued the company with a corporate killer instinct that’s enabling it to survive and thrive in the face of the current harsh economic environment: The innate strength of its own brands and a proven ability to adapt to any market it decides to pursue.

For marketing muscle, the Louisville, Ky.-based Yum has an army of brands – Pizza Hut, Kentucky Fried Chicken, Long John Silvers and A&W – plus its own line of Yum Restaurants that it operates outside the United States.

And its overseas franchises – especially Pizza Hut and KFC – are especially adept at making themselves the people’s favorite local flavor, instead of just their favorite American flavor.

Here’s a look at some of the items on Pizza Hut’s China menu: tuna fish pizza, roasted squid, zesty shrimp soup, a variety of rice-and-meat dishes (kimchi pork, curry beef and Hungarian beef rice), green tea, and chocolate mousse cake.

The bottom line: Yum’s stronghold and growth potential in China is shaping up as one of the most promising investment stories of 2009.

China Stronghold

As far as Yum Chief Financial Officer Richard T. Curucci is concerned, the company’s target for 10% profit growth should be easy to hit.

“We can get these numbers without heroic sales performance” at existing restaurants in China, Carucci said on a Webcast from the company’s analyst meeting, Reuters reported.

While Carucci says that Yum is “still not sure how China’s going to respond to a slowing economy,” he is certain of the company’s master plan which makes the Red Dragon the centerpiece of its growth strategy.

As of now, the United States accounts for 41% of Yum’s operating profits. China accounts for 28% and the rest of the company’s operations around the world account for the remaining 31%.

By 2013, China will account for 40% of Yum’s operating profit, while the United States and the rest of the world will each account for a 30% share, according to company projections.

As this plays out, Yum should outdistance some of its rivals, especially McDonald’s Corp. (MCD). That’s because Yum has done a better job penetrating the China market.

From 2002 to 2007, Yum opened 1,678 new stores in China, for a total of 2,558. In that same span, McDonald’s added 330 stores, giving the Golden Arches’ owner a total of 876 stores in China.

Yum has even stolen McDonald’s thunder in the mascot department. Its KFC mascot, a chicken character (naturally) named “Chicky,” roams stores and interacts with children. And the company’s Chicky program includes in-store birthday parties, kids’ fun camp and school tours of its stores. No wonder that Novak, the Yum CEO, boasted to Business Week two years ago that Chicky had already become “the Ronald McDonald of China.”

“We’re on the ground floor of a booming market, just like when Colonel Sanders started KFC and Ray Kroc started McDonald’s,” Novak told Business Week, noting that he one day wants to have as many restaurants in China as he does here in the United States.

Stateside Strategy

Novak said last week that the United States market was the lone problem the company has had in 2008.

Not only does Yum face a wider number and variety of competitors, but also fighting the headwinds of recession.

In addition to cutting $60 million from operational costs and suspending the company’s share buyback, Yum will offset the planned opening of 200 new U.S. restaurants by closing about the same number.

Other strategies will appear on the menu.

At Pizza Hut, the company is adding lasagna to its new Tuscani pasta line.

At KFC, it’s rolling out a grilled chicken option, a menu item Novak called a “transformational product” at an investor conference last week, The Associated Press reported.

The chicken chain will also create and promote a value menu, featuring items costing from $0.99 to $1.99.

Source: Hot Stocks: Fast Food Restaurateur Yum! Brands Making China its Main Course

This from Smart Profits Report:

Today’s eye-popping financial market statistic is brought to you by John Roque at Natixis Bleichroeder…

Since the U.S. stock market peaked in October 2007, the world’s equity market capitalization has shrunk by 53%. If you’re counting at home, that’s $33 trillion.

So if misery loves company and you’re too depressed to look at your brokerage account statements, maybe you can grab some consolation from knowing that investors all over the world share your pain.

In fact, some poor folks have it even worse. According to Bespoke Investment Group…

• Iceland is down a staggering 90% this year.
• Ukraine is off 76%.
• Bulgaria is lower by 74%.

In fact, 51 countries have experienced worse market declines than the U.S. market’s 44% tumble. So are there any winners at all amid this global mess? Just three…

This Year’s (Very Short) List Of Winners

Only Ecuador, Tunisia and Ghana have posted gains in 2008. Which is why I’m pleased to announce my new investment service – The Ecuador, Tunisia, Ghana Trader (trademark pending).

I’m being facetious, of course. But the point is that there are investors out there who are so desperate to find a performing investment that they’re willing to consider just about everything.

At times like this, you’ll often hear folks confidently booming out the “Yeah, but this time, it’s different” line. I’ve long been an opponent of talk like this. And I’ll tell you why…

“This Time It’s Different”… And Other Soundbyte-Friendly Clichés

During the dot com boom, I was routinely told that I “didn’t understand the new paradigm.”

And when the real estate market took off, I was called names for being so stupid for not borrowing cheap money to buy spec houses and home sites in so-called “can’t miss” places like Port St. Lucie, Florida – a city that now boasts the dubious honor of having more than 11% of the homes in the foreclosure process. Unemployment is also over 10% in the county.

But is it truly different this time?

Investors have endured and overcome a Civil War, two World Wars, and the Great Depression. But now, the government seems to be in the process of bailing out every poorly run business. In addition, we’ve got an incoming president that Wall Street knows little about yet, as well as a rapidly changing financial landscape.

The Game May Have Changed… But The Rules Haven’t

Dr. John P.  Hussman, who runs the Hussman Funds, wrote a letter to shareholders explaining precisely why we’re not in uncharted territory. In fact, if the S&P 500 slides to 780, [...], the market would be in the lowest 20% of all historical market valuations. A drop to 700 on the S&P would represent the lowest 10% of historical valuations.

In other words, things are tough and could get worse, but the market has been here before. To read the whole piece, click here.

In the long run, I believe the way you will make money in the market is the way investors have done it for over 200 years – investing in businesses that grow earnings.

Don’t Pack Your Bags Just Yet… There’s Potential In U.S. Large And Small-Caps Alike

Despite the pervading smell of desperation in the market at the moment, you don’t need to buy shares of Accra Brewery Company, Tunisair, or Diner’s Club del Ecuador to have a prayer of making a profit.

Instead, look for stocks that could rebound in 2009. There are so many that have suffered a beating, the list could be extensive. And when you do, first look at the biggest and best companies in their fields – ones who’ve experienced market downturns before and have stood the test of time.

For example, consider Wells Fargo (NYSE: WFC) in the financial sector.

Take a look at biotech giant Genentech (NYSE: DNA) in the healthcare sector.

Cast your eye over Microsoft (Nasdaq: MSFT) in the technology space.

And as the economy recovers, companies that should fare well include McDonald’s (NYSE: MCD), Caterpillar (NYSE: CAT), Costco (Nasdaq: COST), and ITT Corp. (NYSE: ITT).

Don’t neglect the small-cap market either, though. Small-cap stocks have a history of leading the market out of a downturn. You just need to be careful which ones you pick, as it can still be a volatile sector – particularly in a fragile market.

Companies with revolutionary products include Accuray (Nasdaq: ARAY), a long-term position in the Xcelerated Profits Report portfolio and ViroPharma (Nasdaq: VPHM), which is part of the portfolio in my small-cap healthcare service, Access (for more information on Access, call our VIP Services Team at: 888.570.9830 (within the U.S.) or 410.454.0498 (from overseas).

No Pain, No Gain

Currently, the pain train is barreling down the tracks at full speed and we’re all aboard for the ride.

It’s a bumpy and uncomfortable one, for sure. But it will eventually hit the brakes and pull into station. And when the markets calm down and things return to some sense of normality again, you’ll be glad you invested in stocks that you’re familiar with, rather than exotic investments that are often more trouble than they’re worth.

My colleagues Karim, Jim, Lee and I have all been hammering home this point for a few months now. But it’s crucial that you don’t get wrapped up in the hysteria and make poor decisions now that you’ll pay for later.

Simply put, get ready to buy good stocks on the cheap. I know it’s scary now. But this climate won’t last forever and normal order will be restored. That has been the case for over 200 years.

Source: You Don’t Have To Go To Tunisia To Find Solid Stocks… They’re Right Here In The U.S.