Exactly How to Find Companies That Emerge From Recessions Even Stronger

By Wayne Ferbert, Minyanville The companies poised to come out of a recession with strength are the ones that invest in their infrastructure and research and development even in the face of a bleak economy. It would have been very hard to commit to increased R&D spend in 2008 and 2009 given the market turmoil. But some companies did. Those companies are positioned today to reap the benefits of those investments in two ways: increased market share and more efficient processing/scale. The companies best positioned to benefit are the ones that are small enough and nimble enough to be good at executing on R&D investment. Of course, you might also look for the companies that have a strong return on equity – in other words, they have a history of producing good results from their investments. So, my firm ran a screen to find these companies. The specific screening criteria was:

• Stock must trade on US exchange – and not a pink sheet or bulletin board exchange
• Mid cap in size – as defined as market cap between $1 billion and $4 billion
• 3,000 or fewer employees – to meet the nimble standard for executing on R&D
• R&D spending must have increased consistently thru crisis or increased in each of the last
• two years while being greater than the 2007 levels (i.e., pre-crisis levels)
• R&D spending must be significant part of business – at least $25 million annually
• Company cannot be a bio-tech or pharmaceutical company
• Revenues must have grown in trailing 12 months and company must generate a positive operating income
• Company must have a price-to-earnings ratio that is less than its industry –- i.e., it trades at a discount
• Company must have a return on equity (ROE) that exceeds its industry – in other words, it has a history of making good R&D decisions
• Lastly, because we want room to make money, we eliminated all stocks close to their 52-week high – they needed to be at least 10% below their 52-week high

The result was just six companies:

• NewMarket (NEU)
• Adtran (ADTN)
• Netgear (NTGR)
• Coherent (COHR)
• VistaPrint (VPRT)
• Shanda Games (GAME)

Many of these companies are fairly well known in the mid-cap space. A few are even well known in the household like NetGear and VistaPrint. All six of these companies have options that trade on the stock – meaning you can technically Buy and Hedge them. However, the options market for Coherent and Shanda Games both look a little shallow. You might want to consider only the four that have a healthier options market. Minyanville Editor's Note: For more from Wayne Ferbert, go to Buy & Hedge ETF Strategies. More from Minyanville:

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