The Benefits of Being Trendy

• ByTim Melvin, RealMoney.com Contributor
• On 8:59 am EDT, Friday June 5, 2009

I have always admired those value investors who claim to be able to ignore everything around them and just focus on individual stocks. Even though my final buy and sell decisions are always based on absolute value, I find it very difficult to ignore the world around me.

Even on an island in the Chesapeake Bay, some miles from New York and insulated from Washington, D.C. by a 5 mile long bridge, the world still reaches me. I find it useful to think about the world, trends and developments therein. If nothing else, this can help me avoid the buggy-whip manufacturers.

I am sure the stock of buggy whip companies sold very cheaply in the early 1900s. Given that their entire market was disappearing, they were not even worth considering until trading well below cash and liquidation value. There are social and demographic trends that can have positive as well as negative effects on stock prices.

Catching these trends early while the stocks are still cheap can make you a lot of money over time. In the 1990s, for example, the major trend was personal computers and the Internet. Most value guys missed that one, but if you realized that Michael Dell and Steve Jobs and their little machines were going to pretty much replace mainframes, there was money to be made. Both Dell and Apple companies sold at very cheap prices in the early part of the decade. All of us missed the Internet if we paid attention to valuations.

There was another trend in place in that decade that almost as much fun and as profitable as the Web. In the aftermath of the banking and S&L crisis, interstate banking regulations were relaxed, which set off a merger boom that last well into the late part of the decade. Many of the banks were trading well below book value and mergers were done around twice book. It was the most fun I ever had as a broker or investor.

In this decade we have seen two strong trends run to bubble status before popping and both started out from very cheap levels. Anyone tracking the massive amounts of money flowing into the system after 2001 realized that banks were about to make a lot of money. Rising oil and commodity demand form strong emerging economies had to be bullish for these stocks and they were very cheap at the time the money started flowing.

I have spent some time thinking and talking about this with friends from all sides of the investing coin this week. Where are the new trends that can make us money in the years ahead? The first is one that was widely discussed back in the fall when infrastructure spending was a buzz word of the political campaign. The passage of the stimulus quieted that chatter to a large degree as it really did not address the problem to the degree many had hoped.

Politics aside, our roads, bridges, power plants and water systems need a lot of work. We can delay the work but eventually in the not-too-distant future the work has to be done. My watch list of stocks in this area is pretty long. Companies like LB Foster and Pike Energyare no longer at the absolutely cheap levels I prefer but it would not take much of a drop to get them there again. More conservative blue-chip buyers can focus on companies like Flour and Foster Wheeler.

Another theme that I see emerging is one I touched on briefly yesterday. The fiscal carnage of the credit crisis is going to change the way people spend their money. We have seen the stock market drop like this before but always had the value of our home equity to fall back on. A lot of people have seen their net worth halved in the last two years. That changes the way you think and spend.

It will be a long time before we see people go on a spending binge fueled by home equity and credit cards. People will think before they spend. Obviously this favors companies like Wal-Mart. I think grocery stores like Winn Dixie and Safeway will benefit as more people dine at home. Companies that offer quality at a good price are going to do very well in the era of the new consumer and when they get cheap enough I will be writing (and buying) about them.

The next trend is one where I am far behind the learning curve. China is going to continue to grow as a fiscal and political power. I suspect there will be huge hiccoughs along the road but now that the door has been opened to the world's most populous nation is open, it will step onto the stage. There are back-doors ways to play China by buying companies that do business there and I have purchased some of those in the past.

Regulatory and political issues have kept me from buying China based companies, but this is a thesis I have been revisiting. I am talking to everyone I can find to learn more about the risks and rewards of owing Chinese stocks. I will keep you updated as I climb the curve.

Buying cheap stocks with a margin of safety is and will always remain rule number 1 for me when investing. However, if I can find stocks that meet my criteria that can ultimately benefit from underlying trends I consider that a two-for-one special, something rarely seen outside of happy hour.

Buzz up!