Finding Strong Stocks in a Sickly Market

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If a stock has a dividend, look at its history, Hemauer says. "It's not so much the [size of the dividend] as the consistency," he says. A dividend that is steady or rising is a great sign of financial strength, he says.

3. Sustainable advantages.
Michael Yoshikami, president and chief investment strategist at YCMNET Advisors, looks for "companies that have staying power." He puts Walt Disney Co. (DIS) on his list of "industry-leading companies with sustainable competitive advantages."

Those advantages allow them to capture market share from their weaker competitors.

Another measure of sustainability is the ability to survive economic downturns, either through diversification or because of a business area insulated from trouble. Yoshikami cites Johnson & Johnson (JNJ), which reported better-than-expected earnings July 15 despite the tough economic times.

4. Check out the management team.
Well-managed companies are still having difficulty these days if they're in tough industries like banking, notes Tim Speiss, a partner-in-charge of wealth-adviser practice at Eisner LLP. But the quality of management remains a crucial factor, he says.

Ron Sweet, vice-president of equity investments at USAA, suggests looking to see if, when management articulates a strategy, they stick with it. Also, when the business was doing well because of a good economy, did executives congratulate themselves? Or did they talk about preparing for the next downturn? The latter is an example of "a high-quality company," Sweet says.

5. Customer activity.
Many businesses are only as strong as their customer base.

A company dependent on a small handful of customers is vulnerable if just one of them takes business elsewhere, Speiss says. A company that sells to the federal government might seem like a paragon of strength, but "what happens if the U.S. government cuts its budget?" he asks.

Another measure of customer strength is backlog. Lutts cites First Solar (FSLR), a solar-power firm with a backlog of orders that is 6.5 times this year's sales.

Many experts advise investors to ignore the headlines of the day when searching for strong companies. A nervous market may ignore evidence of long-term strength.

Hemauer says the weak market conditions are giving him a chance to "upgrade" portfolios into stronger, higher-quality names. The bear market can give his firm "an opportunity to make a move into a strong company that we have felt was too expensive" in the past.

The goal is to find stocks that are not only strong enough to survive the current downturn, but to take advantage of the next recovery whenever it finally arrives.

Steverman is a reporter for BusinessWeek's Investing channel.