Sy Harding - Dec 29, 2008

Retail sales are down. Autos and the housing industry are still in the dumps. The financial sector may be under repair - or not. No one knows at this point.

So where is an investor to look for profits in 2009?

Many have apparently given up on the stock market altogether, with record amounts having been pulled out of stocks and mutual funds in recent months. Historically, bailing out after the market has had a 50% decline has not been a good approach.

Meanwhile, most investors, being buy and hold investors, held through some terrible and stressful losses in their stocks and mutual funds, many completely unaware of the opportunities for profits even in 2008 - for those willing to change with the times when bear markets arrive. Some normal market-timing (going after intermediate-term gains from both corrections and rallies ) was the key in 2008.

I expect opportunities in 2009 will be similar but even better.

For instance, my subscribers (and the Street Smart Report Market-Timing Strategy portfolio) took double-digit profits three times in 2008 from the ups and downs of the Russell 2000 Index (which focuses on small stocks). One profit, 11.3%, was from the market's rally off the July low, using the iShares Russell 2000 etf, symbol IWM. But two more profits, 11.7%, and 21.7%, were provided by the ProShares ShortRussell 2000 etf, symbol RWM, which is designed to move up when the Russell 2000 index moves down. We switched into it for the corrections after the March-May rally, and for the market decline in September.

We similarly took a 16.6% profit from the ProShares Short S&P 500 etf, symbol SH, in less than a month in the market's decline in October.

Market-timing also helped us take a double-digit profit of 23.9% from the biotech sector, via the HLDRS Biotech etf, symbol BBH from the market rally off the March low, and then stay out of it while it declined to the November low. And now we have another profit of almost 10% running at the present time from BBH in the market's rally off the November low.

There were also a number of single -digit profits taken by similar switching between 'inverse' and 'long-side' exchange-traded funds on the Nasdaq 100, and S&P 500 index.

We used diversified holdings for both the rallies and corrections, never taking more than a 10% position in any one holding. And I don't want to mislead you. We also took some losses, from holding onto positions too long, or from being on the wrong side at the wrong time.

But overall, the portfolio is up more than 7% so far this year. That's not super, but any gain is a heck of lot better than losing previously made profits, as did the majority of investors, mutual funds, hedge funds, etc., with the S&P 500 being down 38%, the Nasdaq being down 42%, and even Warren Buffett being down 34% for the year so far.

Looking ahead to next year, we expect similar volatility, and our New Year's resolution is to do an even better job of taking advantage of both the rallies and corrections, since we believe the market will again be unkind to buy and hold investing.

In 2008 we pretty much steered clear of individual stocks, preferring the lower risk provided by exchange-traded-funds. In fact, we invested in only one individual stock in 2008, that in a two-month 5% holding of a gold mining stock, GoldCorp, symbol GG (on which we took a 49% profit last week).

However, with the stocks of many excellent companies beaten down to levels not seen in many years, we expect next year will be a year of more opportunities in individual stocks.

One we like, and which we recently took a position in, is Zimmer Holdings, symbol ZMH. You can't get much further away from housing, autos, retailers and the financial sector. Zimmer designs and manufactures orthopedic implants, including joint, dental, and spinal replacements.

Zimmer has been growing steadily from rising sales of its own products, as well as from acquisitions. Its most recent acquisition was Abbott Spine, acquired from Abbott Labs for $360 million. The acquisition was funded from cash on hand and its already existing credit line, worth noting given how the credit crunch is causing problems for many companies.

In its most recent earnings report, for the September quarter, the company reported a 39% earnings increase over the same period a year ago, on a 5.4% increase in sales.

Analysts expect sales, earnings, and profit margins will contract short-term from those kinds of levels, due to costs associated with it latest acquisition, the company's plans to increase its R&D expenditures, and the slowing economy.

However, Zimmer shares plunged with the rest of the market this year, and are 54% below their peak of last October. We believe that more than factored in the expected lower sales and earnings. And on a valuation basis, the decline has Zimmer shares selling at just 1.6 times book value, and at 9.6 times earnings.

Of 20 analysts surveyed by First Call/Thompson Financial, three analysts rate ZMH a 'strong buy', one rates it 'buy'. Fourteen rate it 'hold'. Only two rate it 'underperform'.

There are no guarantees in investing, and we could be wrong, but we believe the selloff in Zimmer shares was overdone. Our upside target is 60, which would be a 50% retracement of the previous decline. We suggest a protective stop at 33 (to be moved up to lock in profit if and as the share price rises).

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com . In 1999 he authored Riding the Bear - How To Prosper In the Coming Bear Market. His new book is Beat the Market the Easy Way! - Proven Seasonal Strategies Double Market's Performance!