Check Your Emotion at the Door

Stocks highlighted in this article include: Diamond Foods, Inc. (DMND - Analyst Report), Nash Finch Co. (NAFC - Analyst Report), Chemed Corp. (CHE - Analyst Report), and Emergency Medical Services Corp. (EMS - Snapshot Report).

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When markets are in turmoil it seems that many investors seem to throw logic out the window. While sustaining losses can cause anyone's blood pressure to rise, how we react to said losses is what separates the successful from the frustrated.

Many of us compartmentalize information gathered throughout our years in an unconscious effort to save time and cognitive energy. While this psychological process can help us cut corners in our everyday life, it can prove disastrous for your retirement.

An Emotional Response

After seeing a downturn in their account balance many investors will compartmentalize all stocks into one negative, costly asset class. Consequently investors will often choose to avoid stocks all together. However, in any market there are firms that do well. Additionally, market timing has proven to be ineffective time and time again. So, the important mental strategy to adopt now is one of defensive and, most importantly, logical portfolio construction.

A Logical Solution

Simple steps can be taken to find stocks that will out-perform and perhaps prosper in tough economic times. Before even looking at fundamentals, take a look at the businesses that consumers can not do without. An easy way to go about this is looking at your own budget.

Odds are you are not buying new cars or furniture, but I doubt you are cutting your health insurance. Your eating habits may have changed so instead of luxury food makers you may want to investigate companies that offer inexpensive alternative when dining out or food producers geared toward cooking at home. Do yourself a favor and do not lump these types of stocks in with high-flying tech stocks.

As for how to pick defensive stocks, you can read more about selecting defensive companies in a previous "Investment Ideas" article from my Sept 19 article Getting Defensive in an Offensive Market".

Some Examples

Below are just a few ideas of companies in industries with consistent demand and could benefit from consumers changing habits.

Diamond Foods, Inc. (DMND - Analyst Report)announced record snack sales on Dec 23. Snacks grew 22% in Nov, to above $5 million, the best month on record. The stocks beta is currently -0.1, ideal for uncertain markets.

The food producer makes affordable and healthy snacks as well as confections used in at home meal preparation.

Michael J. Mendes, President and CEO, said "Looking ahead, our brands are well positioned to benefit from changes in spending patterns as consumers prepare more meals at home or look for greater value in their food choices."

Nash Finch Co. (NAFC - Analyst Report) has a beta of 0.6, which could me more conservative, but given their business they are quite attractive at roughly 10 times forward earnings.

Nash is a food wholesaler, retailer, and distributor for the nations military. Total sales of $1.44 billion were announced during the company's third-quarter earnings announcement on Nov 6. Sales rose 5.1% on a year-over-year basis, up from $1.38 billion.

Chemed Corp. (CHE - Analyst Report) reported impressive third-quarter results in its latest announcement that included earnings per share of 79 cents. Earnings came in 3 cents over the consensus for the second consecutive surprise and the third in the past 4 quarters.

The hospice provider, which has a beta of just 0.1, saw revenues rise to $288 million, a 5.8% year-over-year increase. The main driver was the VITAS segment, which saw patient revenue rise 8.7% to $205 million.

Emergency Medical Services Corp. (EMS - Snapshot Report) is a leading provider of emergency medical and transportation services. In its latest announcement EMSC reported third-quarter results that included net revenue of $679 million, a 28% year-over-year increase.

Earnings per share were 66 cents, 94% higher than the third quarter of 2007. Net income was 47% higher than the consensus estimate, making it the third consecutive earnings surprise. The company also raised full-year guidance again and now expect EPS to be between $1.90 and $2.00, up from between $1.70 and $1.75.

The beta for the medical services provider is just 0.5.

Tying it All Together

As you can see, using a logical thought process and focusing on the basics is a necessity in this market. Take a look at what changes you are making or not making to your lifestyle or spending habits and odds are most Americans are doing the same. Find out who can profit from that and don't be afraid to get on board. Just make sure to take your time, do the due diligence, and above all remember that not all stocks are the same.