Regardless of the market direction, you should always keep an eye out for best of breed companies.  In today’s dynamic market, that can change must quicker than it would even a decade or two ago.  Being able to identify the best of breed company in a sector quickly can make a significant difference in your overall returns.  It is usually these companies that might go down with the overall correction, but not lose as much.  These best of breed companies also go up quicker than the others when the market bounces.

Now the question is has the market bottomed?  Did Warren Buffet call the bottom with his investment of Bank of America?  I think this week will have a big tell in that answer.  I think the market will respond positively to the damage of the Northeast being less than what was anticipated.  The New York markets will all open with a normal business day.  But I feel the real answer to that question is going to come on Friday morning.  There is no doubt that we are going to get a crappy jobs number, which always moves the market.  Now how does the market react is a better question to it.  Guess what, we have had crappy jobs numbers for 3 years now and the global economy is still growing.  Emerging markets have been on fire, and the US economy is not as bad as everyone thinks.  If we end the week higher and no new bad news comes out of Europe financials then I suspect we are out of this correction and the last quarter of the year will be very bullish for the averages.

Best of Breed Names

When we are getting ready for this, it is time to look for best of breed stocks that will bounce the quickest.  I would like to talk about a few best of breed stocks that I feel will bounce for the last three months of the year.

Now we need the financials to lead this bounce out of the correction, so if this thesis is in tact, I want to talk about the 2 best of breed financials.  JP Morgan Chase is the first.  They take much less risk than the other financials because of their solid management team lead by Jaime Dimon.  They have been adding new branches lately and growing their deposits and revenue from credit cards.  Even with all this growth the company is trading at 7 times earnings.  That is a joke.  The other name in the financials that I label as best of breed with a quick upside future is Goldman Sachs.  Goldman traded at $106 on Friday which put it at a PE of 10 with similar strong growth but theirs is fueled more from trading than credit and deposit side.  Both these names have an easy 30% of upside in the next couple months once financials decide to lead us upward.

In the Energy sector, there are some standout companies that are worth a look.  The first is Chesapeake Energy.  They have an amazing CEO in Aubrey McClendon that has been leading this company to new exploration finds and solid growth prospects, most recently an estimated $20 billion find in the Utica shale in Ohio region.  This company does take some risks but they have been extremely successful in doing so.  Chesapeake has high growth (PEG ratio under 1) and stronger profit potentials.  This company has tremendous upside and think it is a bargain at $30 a share.

Another company that has a bright future is Itron.  I feel that eventually the US government is going to have to spend money on infrastructure and this is exactly what Itron is best of breed at.  They makes electric meters and has put new technology into this new power grid making it run quicker and on less energy.  This company has been beat up in the downturn, earlier this year, it traded at $65 a share with its current price at $37.  The company trades at less than book value which is just makes it a screaming buy. 

The last sector I want to talk about is technology.  I am going to focus on three names.  One is just the true definition of best of breed, Apple.  Sure Steve Jobs just retired as CEO, but is staying on as Chairman.  He will still be influential to the company.  But regardless, they have the dominant market share in multiple markets for at least 18 months if anyone else can come in and knock them off the top spot because of the loss of Jobs.  The release of a new Iphone and Ipad will make this company a ton of money, not to mention the Mac is still gaining market share.  Just like the other names I mentioned, this company is a growth company trading at value prices.  The other two names in technology that I want to discuss as best of breed are Google and Akamai.  I am putting these together because they are both going to thrive off the global growth of the internet.  Google for search and advertising; and Akamai with all of the traffic throughout the internet.  Google also has a promising outlook in the mobile phone market now with the purchase of Motorola.  This will make a great vertical alignment in the space with the combination of Droid.  These names will also continue to do well in the last quarter of the year positioned as best of breed names.

Cheers,

Vinny

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