6 Consumer Picks Growing on Our Weakness

12/29/2011 7:00 am EST


Some consumer-oriented companies are doing well as shoppers trade down, says advisor Bill Gunderson. He also tells MoneyShow.com why he doesn’t like putting clients into mutual funds and ETFs.

Kate Stalter: Today, I am talking with Bill Gunderson of Gunderson Capital Management. Bill is a busy guy: He is a columnist at MarketWatch, he hosts a radio show, he’s developed an app called Best Stocks Now, as well as publishing a newsletter.

So Bill, given all of that, you must hear a lot of questions from individual investors. What is the biggest thing that people are wondering about, given all of this market uncertainty?

Bill Gunderson: I would say with all the people that I meet with and talk to, that more than anything they are afraid of the economy. They don’t like the big picture right now.

Kate Stalter: So Bill, I’ve noticed that you tend to write about a number of stocks that perhaps are not so well known to US investors. Some are foreign, some are mid caps—although some are pretty familiar. What criteria are you using to screen for stock ideas?

Bill Gunderson: Well, I think the first important thing for investors to know about the market right now: this is a bad economy and it remains a bad economy. It has been a bad economy for the last three years now. But there are a lot of companies that are thriving in a bad economy.

I invented an app. I use it for my own money management practice but I also made it available to folks who have iPhones or smartphones. It points out to me the companies that are thriving in this environment.

When you look at names like Ross Stores (ROST), PetSmart (PETM), Dollar Tree (DLTR), AutoZone (AZO), and Monro Muffler and Brake (MNRO), you realize that those companies are actually doing very well because of the bad economy.

On the other side of the ledger, if you look at companies that depend upon corporate spending, corporations are sitting on their hands in cash right now. Look at the results of Oracle (ORCL). They were miserable.

So, right now I am heavily weighted in consumer stocks. It's the little consumer going to Dollar Tree, going to AutoZone to fix up the old clunker that’s driving the economy, and those are the best stocks right now.

Kate Stalter: A number of those that you just mentioned seem to have a combination of fundamental as well as technical strength. Are those both metrics that you are looking at?

Bill Gunderson: Over the years, I’ve studied in depth value investing, and I’ve studied in depth momentum investing, and the CAN SLIM side of the ledger, and I think that they both have their strengths and they both have their weaknesses.

The momentum investor closes a blind eye to value, and the value investor never looks at performance. The value investor will go into stocks that have not performed for years, i.e. Bank of America (BAC), and the momentum investor will continue to pour money into very expensive stocks—I think Amazon (AMZN) would be a good example of that.

So, I use a hybrid formula that combines performance—I want the top performing stocks in the market, the Ross Stores, the TJ Maxxes (TJX), the AutoZones—but at the same time I refuse to pay up for those stocks. So I combine value with performance to get my overall grade.

Then lastly, I do look at charts. I look at hundreds and hundreds of charts a day. I’m not a frequent trader. You’ll find that these A-rated stocks can remain at the top for months, sometimes even years.

Kate Stalter: You’re talking here about how you select stocks for buying. Do you have any particular sell rules that you use?

Bill Gunderson: Yes, if the story changes, that would be a sell rule. I owned Netflix (NFLX) earlier this year. I sold Netflix at $270. When they came out and announced that they were changing the subscription and doubling people’s subscription, I sold the stock. I watched it go from $270 down to $65 after that.

When something bad comes along, such as the accounting practices at Green Mountain Coffee (GMCR). I had a double in that stock and I got out of it when I heard that. If I see the chart starting to roll over. If I see the stock becoming too expensive, or if the fundamentals change materially.

But you know all in all, the money is made in the market by making as few changes as possible. I think in today’s world people make way too many changes...but the key is owning the right stocks, and then you don’t need to be making so many changes.

Kate Stalter: That leads into what I wanted to wrap up with today, Bill. You’ve mentioned a number of individual stocks. Do you also put your clients on the advisory side into any mutual funds or ETFs? Or do you tend to stick with individual stocks?

Bill Gunderson: I have a real problem with exchange traded funds and mutual funds. My whole style revolves around buying the very best stocks in the market. An ETF that might have, let’s say 25 or 30 stocks, that covers the technology sector, it’s all a bunch of junk and it may contain two or three good stocks.

It reminds me of the days when I was a baseball card collector. You could buy a stack of baseball cards, not know what was in that and most of it was junk, and there would be a few really good ones in that grab bag.

I like to own the very best stocks. Let’s put together a portfolio of 25 or 30 of the very best stocks from different walks of life, and not a bunch of mediocre stocks.

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