Investing: The Pros' Crisis Playbook

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Market Could Revisit Lows

Arnott at Research Affiliates says he's not ready to turn bullish on stocks yet but believes there will eventually be good opportunities in value sectors that have been bludgeoned, such as financial services. "We don't know which ones will be next on the chopping block, but we can say with confidence that with each failure, the competitive landscape improves," he says.

Regardless of what the government's quarterly economic growth reports say, Ritholtz believes the U.S. has been in a fairly mild recession for a year, one that is already priced into stocks. "What we don't know is whether a worse recession is priced into stocks," he says. The market could revisit the lows from early October and possibly break through them, but he's betting on a broad-based rally that could take the S&P 500 index up 10% to 15% with very little stimulation.

William Nobrega, managing partner of the Conrad Group, an investment advisory firm in Miami, believes that heavy equipment makers such as Caterpillar (CAT) and Deere (DE) will do well, due to strong foreign sales and impending infrastructure investments in the U.S. that could total as much as $150 billion in 2009 alone. Renewable energy outfits like Johnson Controls (JCI) and environmental-services companies like Waste Management (WMI) are also good bets, he says.

Lack of Visibility

Mani Govil, a fund manager at San Francisco-based RS Investments who manages the $700 million RS Large-Cap Alpha Fund (called the RS Core Equity Fund until Oct. 15) is one of the few who see lots of potential in equities specifically because of the lack of visibility about the direction of the economy and the strength of the financial system. But he's focusing on individual names rather than broad sectors. The main reason he's steering clear of traditionally defensive sectors such as consumer staples: The valuations aren't low enough to suggest sufficient expansion once the economy begins to recover. He's looking for companies that are as likely to hold up well during an economic downturn as perform well once a recovery begins.

His favorite pick right now is McDonald's (MCD), whose 2008 earnings are expected to grow between 15% and 20% from last year and between 5% and 10% in 2009, while profitability for most companies is declining. He sees the fast-food giant benefiting from a drop in commodity prices, solid same-store sales growth, and an increase in franchisee-owned stores. "Outside the U.S., they've been selling company-owned stores to local entrepreneurs, who can generally market things better because they're better tied into the local markets," he says. And the profit margins on franchise stores, which give a percentage of earnings to the company, tend to be higher than for company-owned stores, he adds.

He also likes Republic Services (RSG), the third-largest trash hauling company in the U.S., but in his view the best managed among the big three. Trash collectors are more resilient than normal cyclical companies and don't rely on a robust economy, and have some pricing power due to the consolidation that's taken place in the past 20 years. Republic will also benefit from lower fuel prices and may garner cost savings as a result of a recent merger, according to to Govil.

"Bargains for Patient Investors"

Consumer staple stocks such as Procter & Gamble (PG) and Coca-Cola (KO) are attractive investments, not only for their fairly low valuations but their annual dividend growth, says Tom McManus, chief investment strategist at Wachovia Securities (WB) in St. Louis. Procter & Gamble, trading at nearly 13.7 times next year's earnings, is down 17% on the year and has held up compared with stocks that are down as much as 50% to 70%, he says. McManus says P&G's 6.2% dividend yield doesn't sound that impressive compared to other high-yielding stocks, but the company has boosted its annual cash payout an average of 12% over the last five years, thanks to profit growth driven by its focus on international markets. Coke is selling at 13.6 times estimated 2009 earnings and its annual dividend has grown by an average of 11.5% over the last five years.

"These are not tremendous bargains but they're bargains for patient investors who will take advantage of the fact that the broad market is down but the economy hasn't put extreme pressure on these companies," says McManus.

But those who aren't so confident about what the future holds may prefer to take a tip from Laszlo Birinyi, president of Birinyi Associates, in Westport, Conn., who says, "If you make any significant moves [within the next year], you're either guessing or hoping."

Given how quickly markets can change direction, he suggests that people be a little more aggressive in taking profits on stocks they currently own while staying in positions by buying back shares of those same stocks on dips. "You don't want to be out of the market," he says.

Bogoslaw is a reporter for BusinessWeek's Investing channel.