It's been throw-the-baby-out-with-the-bath-water time on Wall Street for so long now that even seasoned investors are taking note of the unusual nature of this particular sell-off. As the management team at the fine, Houston-based Bridgeway fund shop explained in a recent report to their shareholders:
What is different about this bear market -- and each one has its own unique characteristics -- is that, at least so far, many of the companies that have done worst for us are very strong financially. They tend to have less debt than the broader market, strong earnings, and actual cash to back up those earnings.
All of which raises this nagging question: When even high-quality, financially sound companies are cast aside along with the market's far more speculative fare, how should savvy, fiscally conservative investors proceed?
The answer, my friend
By staying the course.
When you've done your investment homework and plunked down your hard-earned moola on companies with, for example, robust return on assets (ROA) and return on equity (ROE) figures -- key measurements of profitability both -- you've made a good start at building a smart portfolio, one that can hold up well over time regardless of Mr. Market's periodic temper tantrums.
If a cold, hard look at a firm's cold, hard cash flow supports that ROA and ROE, well, that's just more reason to hunker down and wait it out. Earnings are notoriously easy to fudge, after all; cash, not so much. Indeed, these days, "Show me the money" should be the mantra for all of us.
All of that helps you zero in -- as I believe investors should these days -- on companies with rock-solid track records of fiscal health and free cash flow (FCF) generation.
Do tell
With that in mind, Wal-Mart (NYSE:WMT), Microsoft (NASDAQ:MSFT), and Johnson & Johnson (NYSE:JNJ) are well worth close inspection these days: Each has generated millions in FCF over the course of many years, and their shareholders have been amply rewarded as well.
That's also true of Genentech (NYSE:DNA), McDonald's (NYSE:MCD), and Baxter International (NYSE:BAX) -- a power trio of companies that have averaged five-year annualized returns of 13%, 19%, and 16%, respectively. The S&P 500-tracking SPDRs ETF (AMEX:SPY), on the other hand, averaged five-year annualized returns of -2% over the same period.
On the other hand …
And then there are those companies at the opposite end of the financial spectrum, firms with market-shellacking price multiples based on a "story" that Wall Street types have fallen in love with -- rather than on operational acumen, financial stability, and a track record of delivering the goods for shareholders.
When the smoke finally clears, the investment case for these dumb investments will likely vaporize, particularly in light of the fact that the early stages of market recoveries are typically led by high-quality concerns with the financial profile I sketched above.
The upshot? Investors who aim to construct a smart portfolio should consider parting ways with these dim bulbs and plow that capital back into brighter ideas.
Speaking of which
That's what we've done at Ready-Made Millionaire, a set-and-forget lineup of intelligently managed, financially sound companies that have rewarded shareholders in the past -- and that we believe will continue to do so well into the future. Our lineup is rounded out with a clutch of choice mutual funds -- including one from Bridgeway -- and an ETF designed to double up on the daily return of the benchmark it tracks.
RMM will open to new members in just a few short weeks. In the meantime, we invite you to click here to learn more about the service and to snag a free copy of our special report, The 11-Minute Millionaire -- a quick, Foolishly substantial read that highlights three things you need to know before investing another dime in this market. Click here to get your copy -- and to get smart -- now.
Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service. At the time of publication, Shannon didn't own any of the securities mentioned above. Johnson & Johnson is a Motley Fool Income Investor recommendation. Microsoft and Wal-Mart are Inside Value picks. You can check out the Fool's strict disclosure policy right here.
