Look for Companies That Stand on Their Own

 | Sep 09, 2011 | 10:24 AM EDT
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Yesterday the focus turned to Washington, but fortunately the speeches from Fed chief Ben Bernanke and President Obama offering little that could concretely influence the economy. (West of the Rockies, folks were more interested in the San Diego blackout.) Obama tried to stir up some animal spirits, but really there is no money for more stimulus, and who believes it would work anyway? Similarly, Bernanke ("Banana Ben") must realize inflation is raging, even if he cannot admit it publicly. He can ask his wife how their grocery bill is trending lately, in case he wants to find out how "anchored" expectations are.

Even with jobs being lousy, corporate profitability is holding up, so I have been expecting a net upward drift in the market, with a lot of volatility along the way as Europe comes unraveled. The anecdotal evidence pointed that way in August, although it is subject to revision at a moment's notice. The people may be ahead of the politicians in realizing that government is out of ammo, so to speak, and it will now be up to the private sector to create tomorrow's jobs -- just like it always is, really.

As most now realize, existing corporations are rarely job creators; it is the new enterprises offering new products and services that will employ the workers of tomorrow. Government policy would be at its best by figuring out to accelerate the development of new products, and new businesses to offer those products.

I often point this out, and have offered a few economic policy prescriptions that could be helpful. For instance, a capital gains holiday on all venture investments (meaning capital used to purchase non-traded equity in a business under three years old) would create a mad rush to fund new businesses NOW, which would result in more rapid growth and more hiring. Programs that enable all entrepreneurs to enter the fray sooner -- rather than trying to pick winners, such as the ill-fated Solyndra loan guarantee -- could work wonders.

Translating this to investments, I am positioning away from stories that theoretically are about to benefit from government stimulus, since I believe it is unlikely to come, nor to be very effective. Look to smaller-cap names off in undisturbed corners of the economy, quietly building new sustainable businesses. Or position toward the high-cash-flow names paying it out in big dividends, so that you, the investor, can reallocate the capital into thriving young businesses.

In my portfolio, recent adds include Celgene (CELG) and Ralph Lauren (RL). These names have low valuations relative to their peers, with solid earnings momentum with estimates being revised up. Importantly, they are relatively non-correlated to any stimulus efforts, and will live or die on the merits of their products.

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