Barron's Sifts for Bargains Among the Rubble

Sandra Ward pens a feature article in Barron's on some stocks to buy when the market recovers:

Jeremy Grantham, market seer and chief investment strategist of Boston money-management firm GMO, stressed the importance of being ready for the inflection point in a recent piece titled "Reinvesting When Terrified." He concluded that "you absolutely must have a battle plan for reinvestment and stick to it," all the more so when prospects appear their darkest. GMO now forecasts healthy long-term returns of 10% to 13% for equities.

There is no question that in an environment in which assets are still being repriced and balance sheets restructured, caution is wise. No one is suggesting investors should double down on the market -- but it is probably time to start averaging down.

Taking Grantham as a sort of inspiration, Barron's screens and finds 56 candidates for investor portfolios:

We have screened for companies whose earnings yield is at least twice that of the 10-year Treasury's recent 2.8% level (it was trading at 2.61% on Friday). We chose that multiple to take into consideration the extra risk associated with stocks. Right now, the stock market as a whole, as measured by the S&P 500 and its earnings yield of 9%, appears to be undervalued in relation to bonds as measured by that 2.8% Treasury-yield yardstick.

We wanted to isolate those companies on the best financial footing, so we weeded out those with debt-to-total-capitalizations higher than 40% and debt-to-equity ratios greater than 60%. To underscore our emphasis on stability, only companies with market values higher than $15 billion made the final cut.

With that market cap requirement, plenty of companies couldn't make the cut, I'm sure. A quick glance and I see two of my holdings on it -- DirecTV (DTV/NYSE) and Microsoft (MSFT/NASDAQ).

If you subscribe to Barron's and read the list, you'll see names easily recognized -- like Dell and Google -- which dramatizes the fact we're in a bear market.

Interesting that only two financials made the list -- Traveler's and (no surprise) Berkshire Hathaway. And one utility: Duke Energy.