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Olstein: Pick Stocks, Not Sectors

Posted by: Karyn McCormack on August 25, 2009

Stocks have had a rocking good time this summer, giving the S&P 500 index a 13.5% gain for the year (through Aug. 24). The Nasdaq Composite index has surged 28% this year, thanks to a strong rebound in technology shares.

Whether the summertime giddiness lasts into September and autumn is anyone’s guess. Veteran fund manager Bob Olstein, who I profiled last week, told me today that investors need to focus on quality of earnings and choose companies that have been able to generate free cash flow even during the financial crisis. “You’ll find protection from the downside by buying companies with free cash flow,” he says.

Olstein also invests in companies with “wide moats” — that is, the leaders and tough competitors in their industry. A few that meet his cash flow and valuation critieria (and are also top holdings in the Olstein All Cap Value (OFALX) fund) include Intel (INTC), 3M (MMM), Cintas (CTAS), and CommScope (CTV).

He also thinks sector plays — such as energy and commodities that have dominated in the last seven years or so — are out, and stock picking is in. “It’s a stock picker’s market as opposed to a sector-driven market,” Olstein says.

What do you think? Are you still making sector bets through ETFs or other sector funds? Or do you think picking individual stocks is the best way to invest?

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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