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Editor's note: To view the stock screens mentioned in this column, download the free MSN Money Investment Toolbox.
You're not rich. You own a few mutual funds in a 401(k) or an individual retirement account. And you're ready to take the next step, to buy a few stocks with the $10,000 or so sitting in certificates of deposit or languishing in a bank account.
And with the Dow Jones Industrial Average ($INDU) still down about 900 points from its all-time high -- which may mean there are a few bargains to be had -- this may not be a bad time to try your hand as a stock picker.
But how do you get started?
Let's begin by admitting this much: All of us, no matter how good we are at stock picking, are going to pick an occasional loser. That's why diversification is important. How many stocks must you own? Opinions vary, but dividing your $10,000 into 10 chunks of $1,000 each is probably sufficient. With many discount brokers charging less than $10 a trade, the commissions won't be significant.
To tamp down the risk, I'm going to cheat just a bit. I'll pick only nine stocks and add a mutual fund.
I'll use screens that I've described in recent weeks to come up with candidates. Then I'll handpick stocks from those lists that seem best suited to current conditions. You may have different ideas. So in each case, I've included a link so that you can run the screen yourself and make your own decisions.
Safety in size
Big, solid companies in steady industries are a good place to start in a turbulent market such as we're currently experiencing.The screen linked here focuses on the 700 or so largest stocks (minimum $20 billion market capitalization) traded on U.S. exchanges and, from that universe, picks profitable companies with reasonably strong growth expectations that are in favor with the smart money. Since the technician (chartist) in me says that's not enough, qualifying stocks must also have strong price charts.
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My screen recently turned up 27 stocks. To pick the most appropriate stocks for this market, I followed two themes. First, although the U.S. economy might be tripped up by the crumbling residential real-estate market, globally, thanks to emerging markets in Asia and Latin America, business is booming. Second, thanks to theme No. 1, the demand for energy and energy-related services will continue to grow, regardless of what happens in the U.S.
Here are four stocks that I picked from my Big & Safe candidate list that are likely to prosper if my assumptions are correct.
| Market cap | Sales | Forecast EPS* growth | ||
|---|---|---|---|---|
$204 billion | $76.5 billion | 12% | Markets beauty, health, cleaning, food, pet care and numerous other products in more than 180 countries. | |
$31 billion | $1.5 billion | 13% | Owns 750 businesses in 49 countries making products used in the automotive, construction, electronics, food and beverage industries and a host of others. | |
$116 billion | $21.7 billion | 21% | Provides a wide range of services such as drilling, pumping, testing, measuring and consulting to the worldwide oil and gas industry. | |
$110 billion | $36.3 billion | 11% | Makes and sells salty, sweet and grain-based snacks, carbonated and noncarbonated beverages and packaged food products. |
*Earnings per share
Click here to run the screen yourself if you want to pick your own stocks.
Buy and forget
Another recent screen also targeted low-risk stocks but followed a different path to find them. Rather than relying on company size, it looked for profitable companies that pay dividends high enough to cushion losses during market downdrafts. Then, among other factors, it employed MSN's StockScouter rating system to pinpoint the lowest-risk stocks with the strongest price-appreciation potential from the pool of high-dividend payers.The screen listed 22 "buy-and-forget" candidates when I ran it (click here to run it now). Here are my three picks from the list:
| Market cap | Sales | Forecast EPS growth | Dividend yield | ||
|---|---|---|---|---|---|
$30.8 billion | $6.2 billion | Not available | 6.1% | Expanding on the emerging market theme I mentioned earlier, the demand for commodities such as copper will also continue to grow. Southern Copper mines, smelts and refines copper, molybdenum, zinc and silver in Peru and in Mexico. | |
$13.7 billion | $2.2 billion | 39% | 4.8% | Develops and operates casino resorts on the Strip in Las Vegas and in the Macau region of China. Since its resorts draw rich tourists from around the world, Wynn is unlikely to notice a slowdown in the U.S. economy. | |
$7.3 billion | $1.1 billion | 11% | 9.5% | Lends money to, and takes equity positions in, midsized, mostly privately held companies to fund growth, acquisitions and recapitalizations. American Capital's operations in Europe would tend to mitigate the effects of a U.S. economic downturn. And American's dividend yield is just too high to ignore. |
Continued: Imitating Warren Buffett
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