How to Navigate This Market

 | Oct 24, 2011 | 2:00 PM EDT
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What a difference a month makes. While October has often been known for painful market memories, it appears this October will be an exception, especially considering that European leaders will likely take action to avert an all-out catastrophe. Even if the aid package is smaller than investors would like, it will still be a step in the right direction, and many investors will view that favorably.

Also, with the U.S. presidential election happening next year, the economy will continue to be the single-most important issue. Anyone wanting to remain in office or get elected will do what it takes to pump up the economy. This morning, the folks at bond giant PIMCO expressed confidence that the Federal Reserve will stimulate the economy, once again, likely starting next year. As this anticipation builds, equities will likely rally.

My above theories, however, clash head on with the economic reality of high unemployment, weak economic growth and a dismal real estate market. So, what should investors believe? The only thing one can rely on are the tangible signals the economy is sending. One clear signal came from the industrial giant Caterpillar (CAT) when it reported earnings this morning. Management essentially said that it is seeing no global recession. The company earned $1.71, well ahead of estimates, and predicted that sales would rise by 10% to 20% in 2012. The company added over 26,000 new jobs although 12,000 came as part of an acquisition.

One can deduce some meaningful points from Caterpillar that can be used to navigate this market. First, the global economy is indeed growing. Second, specific industries within the global economy are doing very well. The Industrial goods sector, which Caterpillar belongs to, is certainly one of them. The agricultural market shows strength, and Deere (DE)  is another deep business with a strong, global platform. Last week, Chipotle (CMG) announced that its sales grew more than 25% quarter over quarter. (Apparently, the U.S. economy has not prevented more people from spending $9 to $10 on lunch.)  But, Chipotle is not a cheap stock, so you do not need to invest in it.

Deere, which trades at 12x trailing earnings and yields 2.3%, on the other hand, is trading at an attractive entry point. Another excellent candidate is Freeport-McMoRan Copper and Gold (FCX), a $36 billion mining giant that trades at less than 8x forward earnings, a multiple that could be based on a depressed earnings number. Shares pulled back due to the quick avalanche in commodity prices along with a labor strike at one of the company's most significant copper mines. The strike has limited mining shipments, but the company is developing revised operating plans to increase mining with a reduced workforce. The company's primary products -- copper, gold, silver and molybdenum -- will continue to experience solid demand for many years ahead.

No doubt, this is not the typical bear or bull market. Nor is this a market that rewards short-term investing, unless you're lucky enough to enter and exit at the right times. But, when it dips, this market offers opportunities to invest in businesses that are growing and increasing profits.

Regardless of what happens in Europe, the world will need more shovels to mine the copper and ore that the global economy needs. People need to eat, so agricultural and related industries will do well. Housing is dismal, so that industry and related sub-industries will not do well. You can choose to avoid them, but in some cases, the valuation may be incredibly rewarding for an investor with a three-to-five-year time horizon. When prices are right, fear of macro events should not deter a sound investment decision.

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