Nine Winning Trades For 2009

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Trade #2: Stay Away From Highly Leveraged Business Models

January is historically one of the three biggest credit issuance months during the year.  We are entering January 2009 with the credit markets in a state of disarray.  We will be watching credit issuance in January with a close eye as it may tell us about the stock market action for much of the coming year.

Companies that rely heavily on debt financing will have profits crowded out by interest expense.  Junk debt yields are now above 20%.  With the cost of capital greatly elevated, many business models may cease to be viable.  Additionally, highly levered companies are exposed to bankruptcy risk with relatively small negative changes to their revenues.

We already are aware of the troubles facing auto manufacturers, home builders and the banking industry.  Other industries that appear particularly exposed include commercial real estate, gaming and traditional media/communications companies.  Before buying any equity or option on that equity, make sure you check the debt/equity ratio and the schedule of when the debt rolls over.

An example of a company in the crosshairs of the market downturn caught with too much debt is Cracker Barrel Old Country Store Inc. (CBRL).  This consumer discretionary company has net long-term debt of about $36 per share and is trading for about $19 per share.  Not good.

Trade #3: Buy Small Capitalization Stocks