If you still look at Amazon Inc. (AMZN) as just an Internet retailing giant, you’re not just missing the point – you are also missing one of the really great long-term profit plays in the market today.

Amazon remains the proverbial 800-pound gorilla in the online retailing space. And business is both healthy and growing. But the company is counting on a whole new series of technology-based ventures that will provide the real fuel that will put this stock into orbit. Let’s take a closer look.

Just last Thursday, in yet another positive “surprise” that Wall Street missed predicting, Amazon annihilated analysts’ earnings estimates by announcing a big jump in fourth-quarter profits and told investors even better days are ahead.

Fourth-Quarter Fireworks

In a financial-crisis environment in which there is supposedly no financing available, in which massive job cuts and huge job worries are causing consumers to cut way back on their spending, in which all retailers – even vaunted discounter Wal-Mart Stores Inc. (NYSE: WMT) – face huge challenges, Amazon actually increased its sales and profits.

In fact, Amazon’s fourth-quarter net income rose a hefty 9%. And not only did its per-share earnings of 52 cents blast through the Wall Street consensus of 39 cents by a full 33%, the company actually boosted its first-quarter outlook, stating that it expected sales to be stronger than analysts were predicting.

For the fourth quarter, Amazon’s sales advanced 18%, beating analysts’ expectations by about 4%. Sales actually would have grown by 24%, were it not for the strengthening of the U.S. dollar.

International sales were even stronger, and now account for a full 45% of Amazon’s overall sales.  One notable category was electronics and general merchandize advanced 31%, and that category now accounts for 43% of worldwide sales. 

One particularly noteworthy achievement was in the area of gross margins, which suffered almost no damage – in spite of a U.S. recession that’s forcing most retailers to discount heavily. Amazon’s gross margins barely budged, dropping from a fairly remarkable 20.6% to a still-enviable 20.1%. 

Remember, this outlook and performance is taking place in a market environment where there’s very little “visibility” – meaning company executives have almost no ability to predict what the market will look like next month, let alone in the next quarter or for next year. That’s forced a lot of companies to discount heavily, and is a key reason that a large number of firms have stopped issuing “forward guidance.”

But not Amazon: It continues to provide guidance – and then to exceed those expectations.

How is the company making this happen? These results point to strong market-share gains for Amazon and to new lines of business being introduced, which are powering the stock higher.  But, before we go deeper into Amazon, let’s consider the economic backdrop, in order to fully appreciate magnitude of Amazon’s accomplishments.

Anatomy of a Meltdown

In my 25-year investment career, I have seen countrywide market meltdowns like the one we’re struggling through perhaps every two or three years.  The hallmark of these crises has been an implosion of the banking system, which has then brought the entire economy down, as well.

In an effort to provide some context – and perhaps some reassurance to U.S. investors – let me say that I’ve seen much worse than what we are seeing in the United States right now. For instance, there are actually cases where all of a country’s banking deposits are either frozen (Argentina 2002) or lost outright (Russia 1998).

In each of those cases, there were two constants:

• From a business standpoint, the strong got stronger as their weaker rivals foundered and failed, allowing them to pick up market share and sometimes to even buy those smaller or weaker rivals.
• From a stock-market-valuation standpoint, however, the strong were initially equally punished in terms of their market valuations as the broader equity markets blew up, meaning their valuations didn’t reflect the much-brighter outlooks for them as stronger market leaders. However, when the market outlook brightened, those stronger firms saw their valuations surge with a vengeance and soar to new heights.

The lesson from each of those crises – from Brazil and Argentina, to more than 10 countries in Asia and in Russia – was that every single country made it back.
This was even true for those countries shackled with inferior policy mixes.  Some might say that Japan – with its “lost decade” – never came back.  This would be an imprecise statement, since Japan’s gross domestic product (GDP) growth was above 2.0% for the two years prior to the crisis and unemployment for the last five years has been between 3.45 % and 4.5%
But what is true is that while even countries with inferior policy mixes eventually made it back, it took a lot longer for that to happen. The speed of their comebacks can be traced to the degree in which the policies implemented made them:

• Open-market oriented, especially with regards to foreign capital.
• A lower-taxation environment.
• Strongly fiscally disciplined – for the long term – because the governing body addressed such serious structural economic problems as imbalances in both the social security and health-care systems.
• Less constricted by regulation.
• More transparent, in both the private and public sectors, especially in cases where the public sector overhauls led to a more democratic governing process.
• More-consensus oriented, particularly when that consensus included support for all the changes I’ve listed here.

While we are not seeing an unequivocal embrace of these tried-and-true recipes by the newly installed Barack Obama administration, mainly because of a bias toward big government, we are seeing an open-minded attitude and some movement in this direction.  And we will have to monitor this closely, because history shows us repeatedly that there are no half measures when it comes to successful economic and financial reform – and because market investors know this and will therefore be watching closely.

Forewarned is Forearmed …and Other Axioms to Live By

This background is important, for we now know that we can expect to see some once-in-a-generation buying opportunities in companies that can navigate this slowdown and position themselves for a massive subsequent rebound.

We also have to remember that his rebound won’t be immediate. But when it does come, that rebound will be huge for the companies that have used this time to buttress their already-leading market position. They’ve capitalized on consolidations in their respective industries or market sectors, and have certainly grabbed market share away from their rivals. The maximum gains will be realized only if financial prudence prevails in the public sector.

Is that happening here in the U.S. market?

Well, we’re about to pass a huge stimulus – perhaps as much as $1 trillion or more, when all is said and done.

There’s an old axiom about government stimulus packages: When money is spent, the economy grows. The key, however, is at what cost and who pays for it. So the short-term “steroids” effect of the stimulus has to be measured against the long-term weight its costs will exert of future growth.  But, ahead of that steroids injection, investors need to invest in the beneficiaries.
A much-repeated market axiom states that  “no one buys at the bottom, and no one sells at the top.” Much like no one was – or will be – ringing a warning bell at the market bottom, no one was ringing a bell at the top a year and half ago.  And nobody will be letting you know which of these companies will be thriving and which will be vanishing – because the investors who understand all this are very busy accumulating them for themselves right now.

So it is no surprise that Wall Street missed by a mile on iconic companies that are thriving, including International Business Machines Corp. (NYSE: IBM), Apple Inc. (Nasdaq: AAPL), United States Steel (NYSE: X), PMC-Sierra Inc. (Nasdaq: PMCS), Level 3 Communications Inc. (Nasdaq: LVLT), 3M Corp. (NYSE: MMM), Colgate-Palmolive Co. (NYSE: CL), Automatic Data Processing Inc. (NYSE: ADP), United Parcel Service Inc. (NYSE: UPS), Merck & Co. Inc. (NYSE: MRK), and many others.  And Wall Street always seems to miss to the downside in its estimates in these superb companies.

In the same way, Wall Street missed it with Amazon.  You see, Amazon survived the dot-com bubble because, unlike most of the start-ups, Amazon actually had a strong-and-viable business model.  In addition, starting with founder and chairman, Jeffrey P. Bezos, and continuing down through the rest of the organization, Amazon has in place a superb management team that has continued to carefully refine and build upon the company’s original vision, and has continued to execute almost flawlessly.

It’s not just the great value, convenience and solid customer service that contribute to Amazon’s results – it’s also innovation.

Those “Killer Apps” – “Cloud Computing” and the Kindle

Amazon first revolutionized the bookstore business. Then it revolutionized overall retailing. Now it’s aiming at the book-publishing business with its super-lightweight electronic reading device – called the Kindle. The Kindle allows you to buy and download books in less than a minute – from almost anywhere – without the need to connect to a computer or any device. Lots of books are available.

This is all possible because you are using the fastest wireless standard and the service is included in the price of the book you downloaded. And Kindle can hold some 200 books, newspapers and blogs and has free wireless access to Wikipedia.  The newspapers and blogs are downloaded automatically and updated instantaneously.  Kindle recharges in less than two hours and you can also email your own Word documents and pictures.

With all these features, I am seriously considering buying one. Here’s why:

• It will eliminate the need to walk down my long driveway to grab my copy of The Wall Street Journal every morning.
• It will be much easier to read than in my PC.
• All my downloads will stored in Amazon’s servers, just in case I lose or damage my Kindle.
• And it will save me countless trips to the library to pick up books for myself, and for my avid-reader daughters.

However, I’m going to wait until after Monday (Feb. 9), because Amazon has invited the news media to an event it has planned for the Morgan Library & Museum in New York City. The scuttlebutt is that Amazon could be announcing the “Kindle 2.0.”

By saving trees (reducing the need for paper) and eliminating the costs for printing, storage and delivery, publishers can reduce their costs considerably and pass part of those savings on to the consumer.  Therefore, the typical book will cost you $10 or less.  And you can even get some steals, like all sixteen novels by Charles Dickens in a single file, with an active table of contents – all for only 99 cents!

It’s incredible.  No wonder Kindle is expanding sales and margins for Amazon.

But Amazon’s “miracle” performance is not due just to the Kindle.  Amazon has jumped in on the fast-growing trend of “cloud computing.”  Now that the Internet has become ultra-fast, and is getting even faster – thanks to such hyper-fast, high-speed fiber-optic networks as the Verizon Communications Inc. (NYSE: VZ) FiOS broadband system – the balance has shifted towards centralized computing. 

What this means is that with a relatively cheap computer and fast Internet access, one can perform most of the computational activities in the servers of somebody else.  So, somebody else will host the applications, store the data and perform the computation – for a fee, as it is accessed via the Internet.

Therefore, the need to maintain the storage and back it up, to keep your systems up to date and even to help prevent viruses is essentially transferred to the supplier of the service. This is especially important for individual users and small- and medium-businesses, which look to minimize all these costs.  But it is also very useful for some large enterprises in services where Amazon’s scale and expertise can deliver superior cost-savings and reliability.

Amazon aims to be a major player in this realm. Indeed, some analysts believe this could one day be the “real” Amazon business, with books and other retail goods serving only to bring folks in the door.

Amazon already provides storage, virtual private servers, elastic cloud computing, which gives developers a resizable capacity, content delivery and a number of other functions through its fast-growing cloud-computing activities.

This cloud-computing trend has also been embraced by Google Inc. (Nasdaq: GOOG), though Google Apps, and Yahoo! Inc. (Nasdaq: YHOO), which has forced Microsoft Corp. (Nasdaq: MSFT), which is built on the premise of distributed computing, to hedge by planning to offer a cloud computing operating system.  The new operating system will enable net books (barebones notebooks), PDAs and other smartphones to take full advantage of sophisticated computing capabilities and massive storage located in the “cloud.”

Clearly, cloud computing will be an explosive business, especially in Amazon’s focus areas of storage, content distributions and scalable computational capacity. 

So, with book sales, electronics and its international efforts already strong and accelerating, and the probability of a Kindle 2.0 announcement now imminent, we need to jump on Amazon, while planning to keep the stock for several years.

Rocking With Retailing

Is this consistent with a sound investment strategy for retailing stocks in the current weak-economy market environment?

I recently saw a noted short-seller, who runs a very successful hedge fund (and you have to be good to be still alive), who indicated that for the first time in a long time, he saw opportunities to make money both on the long and on the short side.  This is encouraging, since for the year and a half prior to last November, the opportunities on the long side have been overwhelmed by the financial meltdown and massive de-leveraging. 

In addition, this hedge fund manager was asking a renowned investor in retail stocks what opportunities he saw for shorting these stocks.  The reply: You have to be very careful – even in retailers, which were experiencing big problems – because, in his opinion, valuations had fallen way too much.

I agree with both assessments. At this point, there are good opportunities to buy, and in retail you want to go with the winners.

For all the reasons we’ve detailed to you, Amazon is that “winner,” the strong company with a rock-solid business model that delivers value to customers, that innovates, that has a clear focus on expansion, and that is producing results even in one of the worst economic periods since the Great Depression.

Recommendation:  Buy Amazon.com Inc. (Nasdaq: AMZN) before Monday’s product announcement and ahead of the rollouts of the stimulus packages planned by both the United States and China (**).

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" (BSH) series, and is also the editor of the longstanding "Money Moves Alert" trading service.

As the hundreds of thousands of readers across the Internet who've read Marquez's insightful BSH missives know, the longtime Wall Street insider has a knack for picking stocks that are poised to move. Indeed, when he recommended the Brazilian exchange traded fund - the iShares Brazil Index (NYSE: EWZ) - in late October, it zoomed 42% in six days.
In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here. The report is free of charge.]

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Amazon.com Inc.

News and Related Story Links:

• Money Morning Buy, Sell or Hold Feature:
  Buy, Sell or Hold: iShares MSCI Brazil Index.
• Money Morning News Analysis:
  Cost of Obama Stimulus Could Reach $1 Trillion Now That Newly Passed House Bill is Subject to Senate Compromise.
• Wikipedia:
  Home Page.
• Money Morning Special Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it (Part I of II).
• Money Morning Special Report:
  The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery – And How to Play it for Profit (Part II of II).
• Wikipedia:
  Dot-com bubble.
• Wikipedia:
  Kindle.
• Wikipedia:
  Cloud computing.
• OnlineLiterature.com:
  Charles Dickens.
• Silicon Alley Insider:
  Google, Amazon Lead Disruptive Cloud Computing Wave, Microsoft Again Behind Curve.
• Zdnet.blogs:
  Amazon’s cloud computing will surpass its retailing business.
• Money Morning Market Analysis:
  Hedge Funds Have Another $200 Billion to go to Complete Their “De-leveraging”

International Business Machines Corp. (NYSE: IBM) has “surprised” the market with flawless execution and strong profits.

A few months ago, I congratulated my nephew for getting an internship with IBM, while he studies business in Argentina.

“It is a superb global company, with a bullet-proof business model and a balance sheet that gives them a huge sustainable competitive advantage,” I said, advising him to use the opportunity to find his way to a permanent job with the company for after he graduates.

With its recent financial results, IBM made me look very prescient, and made my advice to my nephew look very shrewd, indeed. Despite the total meltdowns of the U.S. and global economies last October, IBM executed flawlessly and handily beat analysts’ earnings estimates, expanding both its margins and its profit outlook for 2009. And these two bottom-line-related improvements were made despite a slight drop in sales, which stemmed chiefly from the currency effects of an appreciating U.S. dollar.

The bottom line: IBM reported a 2008 fourth-quarter profit that was up 12% from the fourth quarter of 2007. The company earned $4.4 billion, or $3.38 a share, a result that was up 21% from the $2.80 a share from the year before. Analysts had expected IBM to earn only $3.03.  Total revenue was $27 billion, a slight decline from the $28.9 billion reported the year before.

Last Tuesday, IBM – also known as “Big Blue” – said it expects fiscal 2009 earnings of at least $9.20 per share. That’s nearly 5% better than the consensus estimate of $8.77, according to analysts surveyed by Reuters Estimates

This is just one more that Wall Street “surprisingly” got wrong.  In what has been a constant during this financial crisis, companies in industries ranging from steel to high tech have handily exceeded earnings estimates.

A notable exception, of course, has been the financials, where the companies saddled with subprime mortgages have been forced to mark down their portfolios to ridiculously low “market” prices (there is no market) on packaged securities that are trading at a fraction of their theoretical value. This, in turn, is affecting the equity of banks, and therefore their ability to lend.

In such an environment, many analysts adopted an “end of the world” scenario, where companies halt every possible activity in order to preserve cash.  So fund managers that went into premier high tech companies keep getting rewarded now, as these companies report, while their year-end performance metrics were distorted by Wall Street’s bearish bias.

Clearly, Wall Street’s extremely bearish perception is wrong, given the resiliency of the company’s business model.  The virtue of IBM’s model is that it has effectively transformed itself from the cyclical hardware company that gave it its name into a software-and-service-oriented firm that gives it a recurring revenue stream. In addition into this well-thought-out business model that concentrates on high-margin, value-added businesses.

Success with this strategy is due to IBM’s integrated approach to providing a total solution to its clients around the globe, which encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing..

That last issue – financing – is crucial these days. And IBM’s long history in the world’s markets has given the company a longtime of recognition abroad, which really helps mitigate competitive threats from unproven newcomers.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

Geographically, most of the growth continued to come from the so-called “BRIC” countries (Brazil, Russia, India and China), which grew at a 13% clip, and within the emerging markets, which as a whole grew at a 6% clip. Underscoring the soundness of IBM’s global business was the fact that growth was essentially flat for the hard-hit U.S. market. This geographic shift and segment emphasis resulted in higher profit margins, which have more than doubled, causing earnings per share to more than triple in the last six years.

IBM’s global services – which include global technology and global business services – accounted for 53% of fourth quarter sales, while software delivered 24% and systems-and-technology 20%.  Very importantly, new deal signings amounted to a robust $17.2 billion, which gives IBM a solid outlook for 2009.  This evidenced a 20% growth from strategic outsourcing.

What we have here is a solid-and-growing revenue stream, matched with 9% growth, even in software, and a solid outlook.

An area of vulnerability could be financial services, which accounted for 30% of the company’s business.  Fortunately, the U.S. market – which has suffered the most from the global-financial downturn – only accounts for about a quarter of this business. Another challenge is the more-cyclical segment of systems and technology – mainly servers and storage – mainly servers and storage, which accounts for about 20% of sales, experienced a 16% decline in revenue and a 6% decline in margins.

But margin growth of 4.8% and 5.6% in IBM’s much-larger global-technology-services and global-business-services business segments more than compensated for this, resulting in overall margin expansion of 3% from last year.

Most importantly, IBM has a bullet-proof balance sheet and a fantastic cash flow of $7.9 billion. In times when others are suffering, IBM keeps producing a steady and increasing cash flow, and this financial strength allows the company to provide financing to its customers and keep sales rolling in. This is key; it enables IBM to either cherry-pick business from damaged competitors or buy them outright at cheap valuations.

Hence, IBM’s business model has been precisely been retooled over many years to face moments like this and thrive. If there’s a business lesson here it’s that the strong and resilient not only survive, but run away with the market. IBM’s stable and recurring revenue, geographic diversification, focus on higher-value-added business, and financial strength grants it invaluable defenses against both economic and competitive threats.

Recommendation:  With the earnings surprise and the market’s sudden reversal, the shares of International Business Machines Corp. (NYSE: IBM) have rallied aggressively.  But the story is still intact.  What’s more, the many stimulus plans being implemented around the world will no doubt increase demand in many of IBM’s product-and-service areas. Even the huge consolidation in banking and other industries will boost demand for information-technology products and services.

Hence, the upside is still under-appreciated at the current valuation.  At a forward Price/Earnings (P/E) ratio of less than 10.0, and a Price/Earnings to Earnings Growth Rate (P/E to Growth Rate) ‘PEG ratio’ of about 1.0, the shares of this growing company with strongly reliable earnings deserves much higher multiples.  I would not be surprised to see IBM’s stock price going up by 50% over the next couple of years. Buy half a position right now and complete the remaining half by buying on days of market weakness before IBM’s next earnings report. Plan on putting the shares away for two years (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in IBM Corp.

News and Related Story Links:

• Reuters:
  IBM Corporation Issues FY 2009 EPS Guidance Above Analysts’ Estimates.
• Money Morning Special Investment Report:
  Special Report: Hit the BRICs for a Global-Investing Double Play (Part I).
• Money Morning Special Investment Report:
  Special Report: Hit the BRICs for a Global-Investing Double Play (Part II).
• Money Morning Buy, Sell or Hold:
  Buy, Sell or Hold: ABB Ltd..
• Wikipedia:
  PEG Ratio.

Contributing Editor

Money Morning

Research in Motion Ltd. (Nasdaq: RIMM) – maker of the ubiquitous BlackBerry – is likely to consolidate and increase its market share.

Almost all of our “Buy, Sell or Hold” recommended stocks started out on the right foot here in the New Year.  And our strategy of building up a position gradually up to year-end – to avoid the downward pressure of tax-loss selling, and other volatility – seems to have worked. This has left some cash on the sidelines to take advantage of any sell-offs that are sure to come in the first quarter.

In this environment, plagued with uncertainties, we are going to focus on companies that have bulletproof balance sheets (meaning they require no outside financing), enjoy a sustainable competitive advantage, regularly record high profit margins, and execute their strategies well.
The Waterloo, Ontario-based Research in Motion meets all of these requirements and pops up in our quantitative and qualitative screens prominently. And it helps a lot to have seen this Canadian company handily beat its third-quarter results.

RIMM has a solid, highly defensible franchise in its core market, the enterprise mobile phone segment. You see, the Blackberry line of smartphones has become the “must-have” gadget of managers in Corporate America. And not just because it’s a cool sign of corporate status – the phones are true productivity enhancers among corporate systems managers.

I called the experts just to verify this.  First, I queried a friend who runs systems for a Fortune 50 firm. For obvious reasons, my friend requested anonymity, both individually and for the company.

“If I had to implement a system now, the BlackBerry is the safest choice,” my friend explained.

And because the BlackBerry was specifically designed for this audience – a lucrative market segment – the device features many capabilities that just aren’t available in competing products. And if they are available, the features aren’t as well integrated into those rivaling devices.

To further buttress my research, I also called my good friend Brenda Lewis, a principal with the Greenwich, CT-based Transactions Marketing Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.

Lewis is an independent thinker and isn’t “married” to any particular technology, and she was equally bullish: “RIMM has been innovative – ahead of IT officers’ requirements in security and in their ability to accommodate corporate applications.”

And not only did she confirm the technological edge and superior capabilities that the Blackberry platform has over the competition, she went on to elaborate on a market rumor that has been going around for some time – that Microsoft Corp. (Nasdaq: MSFT) will buy RIMM.

“The probability of Microsoft acquiring RIMM is exceptionally low,” Lewis said.

I am not sure I concur, since the Windows and Blackberry market shares would comprise a very small percentage of the overall market.  Earlier in 2008 the market shares were:

“lack of personal discretionary income in most markets.”

She was right.  Subsequently, industry researcher Gartner Inc. (NYSE: IT) predicted that global sales of mobile phones would dip between 1.0% and 4.0% – even with 308 million mobile phones being shipped in the third quarter. Gartner’s forecast was consistent with a forecast by IT researcher IDC.  IDC predicted a drop of more than 2% globally, despite a pickup 9.0% sales pickup in smartphones for 2009.

But even in a generally cautious environment for wireless devices, this pickup in smartphone sales bodes well for the rulers of the space: Apple Inc. (Nasdaq: AAPL) and Research in Motion. Apple had been outpacing RIMM in sales the quarter before, but RIMM’s launching of three new “must have” Blackberry models should pay some major dividends. The BlackBerry Storm – RIMM’s first touch-screen smartphone – is a direct counterpunch to Apple’s iPhone 3G, which allegedly poses some security risks that become problematic in the corporate environment.  And the Storm, together with the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 will probably propel RIMM as the major market share gainer in the market in the current quarter, as evidenced by the success of the Storm on Black Friday.

In fact, with this early success already well underway, RIMM projected a large increase in revenue this quarter, to as much as $3.3 to $3.5 billion.  Both Apple and RIMM trail mobile device king Nokia Corp. (NYSE ADR: NOK) in market share. With its focus on the consumer – and not the corporate – market, Nokia leads the world with a 40% market share in the smartphone market, followed by Apple with 17% and Research in Motion with 15%.  So the bottom line for both Apple and RIMM is that they will gain market share from Nokia and other makers in a smartphone market that is growing at a 9.0% annual clip.

Research in Motion is poised to do very well for the follow reasons:

• It’s selling into a market segment that’s continuing to grow at a hefty single-digit pace.
• It is technologically dominant in the big-spending corporate market.
• It stands to boost its market share in both the overall smartphone segment and in the corporate segment.
• It has three new models on the market in the BlackBerry Storm the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 – which should enable it to snag additional market share.

All in all, these factors and others should enable Research in Motion should do well in this quarter, and throughout this year in general – despite the negative developments in the global economy.

RIMM shares bottomed at about $36 on Dec. 3, the day it downgraded its outlook. It has rallied some 20% from that quick bottom and has since been repeatedly testing these levels.  At these levels, the stock is already back to the range out of which it started 2007 and proceeded to log in a 250% climb. 

Research in Motion shares closed Friday at $41.92, and have traded as high as $148.13 in the past 52 weeks.

So with all the aforementioned competitive advantages, the stock correction that seems to have run its course and a valuation that results in the lowest PEG (Price/Earnings to Earnings Growth Rate) ratio among its comparable peers (Apple, Nokia and Microsoft), RIMM is a compelling buy.

Recommendation: Buy RIMM shares immediately. But don’t purchase your entire intended position all at once. Leave some firepower to buy a second block of shares during a strong pullback in the stock or in the general market – should one occur – or after the company reports results from the current quarter. (**)

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Research in Motion.

News and Related Story Links:

• Money Morning Buy, Sell or Hold Feature:Buy, Sell or Hold: Apple Inc.
• IDC.com:�

  Mobile Phone Market Poised for Slowdown in 2009, Says IDC. 

The “right” Latin America will thrive in the New Year, fueled by ts own growth – with an assist from the continued hot growth from China – while the “wrong” Latin America will get left behind.

The second phase of emerging markets expansion is well on its way – a period of self-sustaining growth, driven by consumer growth and infrastructure spending.  And Latin America, following China and other Asian economies, is one of the key global pillars of growth that will save the global economy and the U.S. financial system from total collapse. But not all the countries in Latin America will go on to prosper.  There is a wide gulf in the policies that will continue to separate the winners from the losers.

Let me explain.

In a recent article in our affiliated monthly newsletter, The Money Map Report, Money Morning Investment Director Keith Fitz-Gerald made three important points:

• The emerging markets (of which Latin America is the second-most-important leg) will play a growing role in the continued long-term growth of the world economy.
• The U.S. economy will continue to grow long-term, but its relative importance in the world economy will continue to decline.
• In the near term, the emerging markets could well play a determining role in keeping the overall global economy – and the U.S. financial system – from dropping into a depression-like funk that we won’t be free of for years. Emerging economies in Asia and parts of Latin America have huge cash reserves, much of which will be invested in infrastructure projects over the next 20 years.

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion for the same purpose.
This is important to remember, given that the dramatic sell-off the emerging markets have experienced has many investors doubting the ability of these countries to “decouple” from the global economy.  The reality of the situation is that most investors and pundits are failing to differentiate between economic decoupling and market decoupling.

The Gloomy Present

While growth in emerging economies has dropped slightly, the prices of securities and currencies in emerging markets has fallen drastically.   Many investors think that the U.S. economic crash will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to drop off. That, in turn, would squeeze the profits and market valuations of the companies that operate in these economies.

But that’s a mistaken assumption. And here’s why.

In Brazil, for instance, exports account for a mere 13% of gross domestic product (GDP). In China, exports are just 10% of GDP. So some contraction in U.S. and European orders can easily be counterbalanced by fiscal and monetary stimulus in these countries.

On Oct. 27, in the depths of a rabid, indiscriminate sell-off, I published an extremely bullish piece on Brazil. Since that article was published, Brazil went on to rally as much as 47%. As of Friday’s close – even after some subsequent profit-taking – the exchange traded fund (ETF) that represents the Brazilian market (EWZ) is still up 21% (and has risen as much as 42% since my recommendation). 

And most emerging markets economies have plenty of fiscal and monetary maneuvering room. Leading the pack is China, which accounted for some 27% of global growth last year, and which has continued to use both fiscal and monetary tools to keep itself on a solid growth path.

It recently slashed interest rates again, down to 6.66% (a lucky number in the Chinese culture, meaning “things (are) going smoothly”).  With record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010.  And the Chinese yuan will drop almost 7% vis-a-vis the U.S. dollar to cushion losses in trade.  It has also lowered taxes on investments in capital goods.  And in a key move that’s been almost totally overlooked by the media, China has made huge market-oriented reforms in agriculture. 

China has just allowed its 780 million farmers to rent, transfer or utilize as collateral their rights to their lands and eliminated all taxes on agricultural production and to farmers.  This will allow for a massive increase in the scale of production by consolidating companies.  In this way, China will keep its 120 million hectares dedicated to agriculture exclusively, with no possibility of urbanization, while at the same time allowing the millions of small farmers to sell out, and get capital to move to the cities.  This will not only increase the productivity of Chinese farming dramatically by allowing for economies of scale to work and attracting billions in investments, it also will create a huge incentive for these millions of farmers to move to the cities, boosting housing and infrastructure demand.

Brazil’s plans are very similar to those of China. There’s a:

• Strong fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
• An easing of capital requirements to Brazil’s strong banking system, which will incentivize housing and car loans.
• Export financing.
• And huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

The Breakdown on Brazil

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by emerging economies are goods produced by other emerging economies.  Trade between Latin America and China has increased by 13 times since 1995, from $8.4 billion to $100 billion.  And China, now the second-most-important commercial partner to the region after the United States, has finally been accepted as a member of the Inter-American Development Bank, committing itself to contribute $350 million to the bank. As an example of this growth in industrial trade, Argentina just bought 279 subway cars from China’s CITIC Group.

However, not all trade with China has been successful, due to China’s notable deficiencies in quality control, especially in health standards.  For example, Latin American imports of medicines manufactured in China had catastrophic results in Panama two years ago, where more than 100 people died and hundreds more became ill from medications containing toxic Chinese glycerine.  Recently, Panama detected toxic chemicals in imported Chinese sweets and crackers and Argentina’s customs recently seized Chinese 20,000 thermos containers for having elevated content of toxic chemicals.

And all of this means that there is a market disconnect between the prices of Brazilian shares and those elsewhere in Latin American equities and the fundamentals of the underlying companies, that we will see played out in the next and subsequent years.  Why?

Just because huge financial losses by banks precipitated a massive de-leveraging cycle, which means they had to sell their holdings, regardless of merit. And that included big sell-offs in preferred investments, including the hugely promising and profitable Petroleo Brasileiro SA (Petrobras) (ADR: PBR), Vale (ADR: RIO), and many others.

And what is worse, their sales hit the stop losses of major hedge funds, who were also leveraged in such favorite plays as commodities, steel, coal, agro, emerging markets and even defensive stocks such as the U.S.-based Pepsico Inc. (PEP). 

When you have the proprietary positions of banks and hedge funds all trying to get out of the same door at the same time because of risk management issues, you get the current disconnect between market fundamentals and pricing.

Another impact that we have to understand is that the ongoing dramatic interest rate drops in all major G7 economies and the more than $3 trillion in G7 fiscal programs will have a marked impact on growth next year, containing what would have been a much nastier economic contraction.  But while G7 countries will barely grow between negative 0.5% and a positive 1% in 2009, with the worst contraction front-loaded and recovering in the second half, emerging economies will grow at a minimum of 4%, and in the case of China maybe as high as 10%.

In my October Brazil analysis, I detailed the massive stress that Brazil came under in 1995 because of another exogenous shock: The Mexican devaluation, the so-called “Tequila effect,” which ricocheted around the world, and which caught Brazil in 1995 in a much weaker position than it is in today. Back then, Brazil had a much higher level of debt, much lower reserves, a fiscal sector that needed huge reform, and a much lower capacity for exports.  Brazil dealt with this massive stress effectively and went on to work at each one of its weaknesses in the next 13 years, getting itself into a position of strength today.

While having the temptation and the perfect excuse for a default right at hand, Brazil proved its seriousness back then by taking the hard, but certain road to progress, keeping its international commitments and gradually affecting strong structural reforms.  Since then, it has become a net creditor to the world; it controlled inflation, and avoided an overheating of its economy with tight fiscal and monetary policies during the recent run-up in commodity prices.

This is paying off strongly today.  The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, has allowed Brazil to move forward and to anticipate GDP growth of 4% to 5% for the New Year.
Hence, Brazil is by far my favorite Latin American play for 2009.

Checking Out Chile

Following closely behind, and hindered only by its small size, is the poster child of fiscal and monetary prudence: Chile.

Chile, which came out of its 1970s default by eliminating its foreign debt and successfully restructuring its banking system, has made every effort to maintain very prudent fiscal and monetary policies and to diversify its exports away from copper, which, being the largest exporter of the metal in the world, still accounted for 38% of its GDP. 

Today, Chile exports many diversified products, including agricultural products, wine, fertilizers and industrial wares.  And because it’s situated on the Pacific Coast, it is geographically well positioned to trade with the fastest-growing markets in the world – China and the other emerging Asian tigers.

But Chile, in order to minimize the cyclical nature of its economy due to the wide fluctuation in the price of copper, decided years ago to start a “rainy-day” fund, which would accumulate wealth in the good years and be used to soften the blow in the bad ones.  Now, Chile boasts a $28 billion sovereign wealth fund, accumulated almost completely from its copper profits.  That’s almost equal to a staggering 14% of the country’s GDP in cash savings!  This will enable Chile to implement counter-cyclical policies to keep growing at 3.5% to 4% next year – or about the current rate of growth, even with the worldwide meltdown.

Chile already has started to deploy this capital, having passed a $1.15 billion government plan on top of last month’s $850 million to stimulate housing and small-business lending, injecting that capital into a government bank that will make available loans for small businesses.

Avoid Argentina

Chile’s fiscal prudence is in direct contrast to Argentina’s lack of discipline.  Argentina’s Peronist government, which squandered the agricultural commodities bonanza in fiscal spending, is now is trying to use its majority in both houses in Congress to pass the nationalization of the privatized pension funds under the excuse of “protecting them from market volatility.” 

These funds, which now have successfully grown to more than $30 billion in size, or 73% of the government’s budget and have returned an average of more than 13% a year since inception will allow the government to cover its fiscal gap and debt maturities next year and to financed public works and consumption projects.  The government, at the same time, is suffering from an important loss of confidence, as evidenced by its need to resort to police controls in order to prevent the illegal purchase of U.S. Dollars.  Argentina might end 2009 with growth of negative 2% and unemployment of 10%.  Stay away.

A “Maybe” for Mexico

Mexico, given its strong links to the United States, is receiving a heavy dose of external shocks on many economic and financial fronts – especially where the United States is concerned: It’s being hit by a drop in exports (the United States is the main component), the drop in oil prices, lower tourism (its largest proportion of travelers is from the United States), falling U.S. investments in Mexico, and reduced remittances from Mexicans working in the United States back to their Mexican relatives.

In addition, many companies suffered strong losses in their derivatives hedges, banks have had to reduce lending due to reduced liquidity and the Mexican peso has lost some 22% of its value against the U.S. dollar.  Mexico’s growth in the New Year may fall to about 1% from 2008’s 2.4% pace, and the country is on its way to approving the first budget with a fiscal deficit in four years.  The government’s target will be negative 1.8% of GDP, in order to stimulate the economy.  Mexico, seeing its oil production declining, is seen moving soon towards opening some oil areas for exploration and development, which some estimate could add another 1% to GDP.

Once the U.S. markets have stabilized, Mexico’s stocks will be an incredible buy once more, since they discount a very bad scenario at these prices.

A Case Against Colombia

Colombia, another country that has merited a lot of attention, given its staunch support of U.S. anti-drug and anti-money-laundering efforts, has seen its free trade agreement with the United States inexplicably delayed. 

The country foresees a tightening of credit conditions, so it is moving up its peso-based borrowing to this year.  Next year it will issue only $1 billion in foreign bonds and tap $1.4 billion from multi-lateral lenders.  So the refinancing risk for Colombia is muted, given the small amounts involved, and the country’s economy should expand a minimum of 1% in the New Year, even in the worst economic scenario. However, Colombia could grow as much as 4% under a moderate scenario.

That would represent a big drop from the 8% growth recorded this year.

The story in Colombia has been the curbing of inflation, and how far behind the curve the central bank has been, at least as recently as July, when it boosted rates up to 10% and then kept them there.

These ultra-high interest rates, combined with the global slowdown, have blunted demand for consumer products in Colombia. Since the passage of the trade pact is a situation in flux, I want to wait and see right now.

I will not go into the economies of Venezuela, Bolivia and Ecuador, which, with massive intervention by their governments and advances against property rights, are experiencing severe economic and political stress, and which do not offer the guarantees needed for foreign investment.

News and Related Story Links:

• Money Morning Buy, Sell or Hold Feature:
  Buy, Sell or Hold: iShares MSCI Brazil Index.
• Money Morning Global Investing Roundups:
  Brazil ETF Rises as Much as 42%.
• Money Morning News Analysis:
  Massive China Stimulus is Viewed as an Attempt to Help the West.
• Money Morning News Analysis:
  With its Pension Fund Grab, is it ‘Déjà Vu All Over Again’ For Argentina?

With BHP Billiton Ltd. (NYSE ADR: BHP), it’s a case of the strong getting stronger and possibly even running away from the pack.

Back in 2001, BHP Ltd. and Billiton PLC merged to form BHP Billiton Ltd., the world’s
leading diversified resources group. And it never looked back.

Now, the lowest-cost natural-resources producer with the broadest portfolio of offerings, BHP superbly positioned itself to weather the current global downturn. Indeed, back in June the company reported its seventh-consecutive year of record profits. Financially, the company is well positioned to maintain its high level of investment in its business.

And because the Melbourne, Australia-based mining giant has so many of its operations in the Pacific region, it is perfectly positioned to continue serving two of the world’s fastest-growing markets: China and India.

The bottom line: BHP is exceptionally well diversified – not only in terms of the commodities it mines and sells, but also in terms of the markets it serves. This has allowed it to minimize the regulatory, climatic and geological risks it faces.

And that diversification is paying off. As millions of people emerge from poverty in Asia and other markets from around the world – led by the creation of a massive middle class in China and fueled by global synchronic growth – the demand for commodities will soar in the years to come. And so will commodity prices.

China alone has expanded the worldwide demand for steel by an amount that equaled the combined production of Canada and Mexico. Over the past year – from copper to coking coal to crude oil – we saw similarly impressive growth statistics around the world, an uptick that is putting pressure on the capacity of the commodity producers around the world. During that time, BHP’s profits grew spectacularly, but it’s also important to note that the company grew in a very balanced and conservative manner.

At a time that many international banks came close to collapsing and needing recapitalizations, BHP posted a net operating cash flow of  “only” $18 billion. This strong cash flow, combined with a very low net debt leverage of only 22% at the end of June, has allowed the company to maintain its share buyback program and increased value for investors. It’s also allowed for a generous increase in BHP’s dividend, which at Monday’s closing price of $40.40, yields an appetizing 4.06% and that could easily get to the 5%-6% area soon.

The company also has dropped its bid for

BHP’s decision to end its takeover of Aussie mining rival Rio Tinto PLC (NYSE ADR: RTP) was also a good one.  Rio Tinto’s acquisition of Alcan Inc. put Rio in a leveraged position, which increased that company’s credit and business risks. Besides, in a time of low liquidity and scarce financing for deals, the divestments of assets that a merged BHP-RTP would have to complete to receive the needed financing would have so devalued the deal that it almost wouldn’t have been worth doing.

What About the Global Recession?

The recession has greatly impacted commodity prices. Oil has dropped from its record level of more than $147 a barrel in July, to less than $40 a barrel. Analysts are forecasting a near 60% drop in the price of coking coal for next year, as well as price declines of 20% to 30% for aluminum, copper and nickel.

But even with these price declines, BHP’s margins could actually expand in many of its key lines, as marginal players shut off production and BHP’s volumes expand. Cost-cutting, new lower-cost production, and synergies may also offset the adverse effects of falling prices.

Additionally, prices for iron ore and coking coal could actually start to rebound as more governments turn their attention to massive infrastructure projects and the need to diversify energy sources. 

For example, BHP is still moving ahead with an expansion in its uranium production, as the company has “so far been able to substantially maintain sales volumes.”

At the same time, the uncertainties with respect to prices are huge.  Currently, from iron ore, to copper and aluminum, price negotiations for next year’s contracts have gone nowhere.  Buyers insist on bringing contract prices closer to the now-lower spot prices, but producers are trying to minimize the damage by waiting for prices to bounce back.

Until that happens, the old contracted prices – which are much higher than the current spot prices – are still in effect for much of BHP’s volume. Of course they will come down, but the real question is by how much. 

Why Commodities Could Come Back Faster than Wall St. Thinks

Wall Street estimates have are extremely bearish at the moment. That is reflected in BHP’s stock price, which has been slashed by nearly three quarters in the past nine months.

However, I do not believe any of the current price projections are factoring in the two “mothers of all infrastructure-stimulus plans,” being launched simultaneously by China and the United States. The operative word here is stimulus.  And the focus of these plans is infrastructure, which uses huge amounts of steel, copper and other raw materials.

Also, all of these commodities are priced in U.S. dollars.  And the U.S. Federal Reserve just happened to drop the benchmark Federal Funds rate down to nearly 0.00%, while also shifting its monetary printing presses into overdrive. This is likely to lead to an orderly decline of the dollar, and consequently, a rise in commodities prices.

Other countries are in the same boat – from China, India and Australia, to the European Union, and even to Brazil and Chile. In every case, the central banks are dropping interest rates and bank-reserve requirements, and launching stimulus plans along similar lines, even as their central governments are cutting taxes.

Inflation will be a key result. And a declining dollar and zero interest rates are the winds behind the sails of commodity prices.

My expectation is that demand for steel will surprise analysts to the upside as these stimulus plans start kicking in.  In fact, we have already seen some minor firming of steel prices in China, as well as a solidifying of bulk shipping rates.  Further helped by a weaker dollar and zero interest rates, commodity prices will rebound from this year’s weakness.  This will enable analysts to actually abandon their “end-of-the-world” scenarios for commodity prices as the prospects for higher-negotiated prices increase.

We already are seeing increased actions by the Chinese government, which has continued to drop interest rates and bank reserve requirements, and has increased support to consumer lending, as well as the housing sector.  In China, more than any other large economy, government action is crucial, and the direction is in favor of higher economic activity. 

At this very low valuation and with a very loose global monetary policies almost certain to give it a tailwind, BHP’s stock has already found some buyers at lower levels and has been able to cross its exponential 200-day moving average to the upside for the first time in this bear market. 

It’s a proven fact that recessions are the best times to pick up cyclical stocks for the long term.

No question about this: the recession will end someday.  Many, including the International Monetary Fund (IMF) and myself, expect a pick-up in activity in the second half of 2009.  And stocks typically run some six months ahead of the economy. 

Even as we are getting horrible economic news in the fourth quarter, as the full effect of the global paralysis is revealed in economic metrics, we should note that stocks vary according to the second derivative of profits:  In other words, they respond to changes in the rate of profit growth (or contraction).

Right now, market projections in general and in BHP in particular, factor in the full effect of a horrible fourth quarter. But if the first and subsequent quarters, although still bad, are “less bad” than this current quarter, the stock could actually rally from here, while still in the midst of bad news. And this process, while not linear, and mired with confusing volatility, should deliver strong profits.

ACTION TO TAKE: Buy BHP Billiton Ltd. (NYSE ADR: BHP). This is roughly the right time for an investor to pick up BHP shares for the long run, especially ahead of the so-called “January Effect,” if there is one this year. However, the uncertainties remain daunting in terms of commodities pricing, government policies and the global economy.  So it is a good idea to stagger the purchases over the next three months by buying half of your position before yearend and the other half on weak days in the first quarter.  I would wait on most of the others, other than Vale (NYSE ADR: RIO), given their weaker financial position, lower margins and more exposure to price drops in commodities. (**)

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in BHP Billiton Ltd.

News and Related Story Links:

• Money Morning News:
  Bank of China Tries to Spur Economy with Fifth Rate Cut in Three Months.
• Money Morning News Analysis:
  Massive China Stimulus is Viewed as an Attempt to Help the West.
• Wikipedia:
  January Effect.

In an appearance on NBC’s “Meet the Press” on Sunday,
Wal-Mart Stores Inc. (NYSE: WMT) Chief Executive Officer H. Lee Scott Jr. said the recession is changing consumer-buying habits.

What Scott didn’t say is that Wal-Mart is perfectly positioned to capitalize on those changes.

“The No.1 issue today is [consumers'] concern about their job,” Scott said during the nationally televised interview. And because of that concern, Scott said consumers are making some of the following changes:

• In the discounter’s “pharmacy group, we have increases in prescription drugs, but not at the same rate it was. What we’re seeing is an increase in self-treatment.”
• Cash-strapped shoppers also are making different food choices, meaning Wal-Mart is “seeing an increase in food storage as people are cooking more at home.” Consumers are “using leftovers more extensively,” and buying more frozen food.
• Even the owners of small businesses are altering their buying patterns to better manage their cash flow, by shopping more frequently, but by buying less than usual during each visit, Scott said. For instance, restaurant owners stop in more often and buy a day’s supplies at a time, which stretches out that cash flow and reduces spoilage.

At a time when the U.S. retail sector is in the throes of its worst stretch in years, Wal-Mart may be the one retailer that investors want to own. The world’s largest retailer, Wal-Mart last month reported a 10% jump in its third-quarter earnings per share. The company’s sales jumped 10%.

That performance is a big part of the investment case for Wal-Mart: Here we are, a year into a recession, and Wal-Mart, a retailer, is posting a double-digit gain in profits, and a healthy single-digit increase in sales.

This apparently counter-intuitive trend is actually a typical phenomena reserved for market leaders who also enjoy cost leadership in their own industry.

Let me explain.

In any industry – and especially one in which one firm’s wares can be easily substituted by those of a rival (which is very true of retailing) – the key to survival is to have a cost advantage over the competition. As demand falters, the low-cost player is able to under-price its rivals, attract additional traffic, gain market share and thrive, while the weakest players get squeezed right out of the business.

In the retail sector, this is playing out like a Harvard Business School case study.  For November, Wal-Mart’s comparable-store sales increased 3.4%, while most of its competition saw actual sales declines. Even consumer-products king Procter & Gamble Co. (NYSE: PG) is showing that its sales through Wal-Mart are increasing, while sales through other retailers are down.

Wal-Mart’s unrivaled ability to buy in huge volumes allows it to obtain extremely favorable pricing from its suppliers.  If those suppliers want to deal with Wal-Mart, they must accept the razor-thin margins the retailer affords them. Any supplier that even thinks about balking need only remember what happened to Rubbermaid Inc.

Back in the early part of the 1990s, in what is now regarded as a classic example of the market power that Wal-Mart was able to amass, consumer-products giant Rubbermaid Inc. found that rising oil prices were forcing up the cost of the ingot-like plastic balls that served as the raw material for its ubiquitous plastic storage tubs. Following what was then standard industry procedure, Rubbermaid tried to pass those higher expenses along to Wal-Mart in the form of higher product prices.

But Wal-Mart, known for its “falling prices” philosophy, not only balked – it fought back. It not only refused to pay the higher prices, it ordered Rubbermaid to find ways to cut the prices of its wares – even in the face of steeply rising raw materials prices.

When Rubbermaid refused, Wal-Mart slashed the amount of shelf space devoted to the Rubbermaid products, and gave the space to a little-known, privately held firm called Sterilite Corp., which had started life as a maker of plastic shoe heels that had the sad propensity to melt. So Sterilite switched to making plastic containers for the home.

Rubbermaid never recovered, and in 1999 it was forced to merge with Newell Inc. to form Newell Rubbermaid Inc. (NYSE: NWL). Rubbermaid remains the No. 1 maker of plastic storage containers. But after having come out of almost nowhere, Sterilite is today No. 2.

So in addition to being the “channel commander” – with an ability to dictate terms and prices to suppliers – Wal-Mart’s very lean cost structure and high efficiency from its highly-optimized logistics operation allows it to minimize corporate fat like no other and translate those savings into low pricing for its customers. With Wal-Mart’s sophisticated integrated sourcing-and-distribution system, competing on cost across the board against them is simply not possible for any of its competitors.

And consumers know it.

As Wal-Mart CEO Scott noted in his “Meet the Press” interview, even with gasoline prices way down, consumers are hunkering down.  With unemployment already at 6.7% – and rising fast – the increasing ranks of the unemployed and underemployed alike have already slashed their spending.  And even the folks who have kept their jobs are worried – and are acting accordingly.

The drop in home prices and the evisceration of savings and retirement brought on by a bear market that’s vaporized some $6 trillion in shareholder wealth add the final brush strokes to what was already a very dark economic portrait. Consumer confidence has plunged, and consumers are keeping their wallets in their pockets, partly to boost savings.

It’s an environment in which consumers and companies alike are well advised to employ a defensive mindset every bit as aggressive as the Pittsburgh Steelers. But not Wal-Mart. Instead, the retailing giant has gone on the offensive and is attacking the marketplace with the gusto that’s more like the Drew Brees-led New Orleans Saints.

In short, even though so many consumers are employing a back-to-basics mindset, as CEO Scott described, Wal-Mart isn’t sticking with just food and consumer staples. The chain is taking advantage of troubles in the electronics marketplace with the bankruptcy of Circuit City Stores Inc. (OTC: CCTYQ) and is even making huge inroads in electronics against Best Buy Co. Inc. (BBY).

For example, Wal-Mart is marketing both the Apple Inc. (AAPL) iPhone and Google Inc. (GOOG) G-Phone. It’s also is resorting to proactive advertising of discounts through text messages and other aggressive tactics in order to highlight its discounted merchandise and bring customers to its stores. Needless to say, the strategy is working extremely well.

But what about the change in leadership?  Neither I nor most of the analyst community expected the recent announcement that Scott, 59, would be stepping down as the retail giant’s CEO, effective Feb. 1. But Scott is being succeeded by Michael T. “Mike” Duke, 58, head of the company’s overseas operations, and an executive with substantial global experience. So I am both comforted and optimistic.

I see continuity in Wal-Mart’s core strategies and, if anything, an invigorating shot into Wal-Mart’s overseas strategies.

In fact, this executive shift should play out extremely well for Wal-Mart. With the announcement of its record fourth-quarter sales and earnings back in February, Wal-Mart Stores Inc. (WMT) became the world’s first $100 billion retailer. With an increasing penetration of China, and continued, unabated success even in emerging market countries such as Mexico that have been affected the most by the ongoing U.S. financial-crisis-spawned recession, Wal-Mart is ready to reap the growing benefits of its international foray.

Next year, while the world’s most-advanced economies will be barely growing in the aggregate, emerging economies will post growth of between 3% and 8%, led by China. This should enable the retailer’s overseas sales to climb by as much as 10%, in spite of the global turmoil.

In conclusion, the U.S. recession should translate into increasing market share gains for Wal-Mart here at home, while an increasing penetration into the much-faster-growing economies abroad will help propel both the top and bottom lines for the company. With a Price/Earnings (P/E) ratio of 15 and a very-low EBITDA multiple of only eight, this defensive profit play is poised to continue delivering capital appreciation and market outperformance in the New Year, despite a very difficult backdrop.  Wal-Mart should be a core stock in virtually every portfolio.

ACTION TO TAKE: BUY Wal-Mart Stores Inc. (NYSE: WMT), but do so with some care. Buy half a position today and leave some powder dry to complete the position in the first quarter of the New Year, since volatility will remain with us for some time to come. **

News and Related Story Links:

• Money Morning Global Investing Roundups:
  Buy/Sell/Hold ETF EWZ Zooms 42% in Six Days.
• Reuters:
  Wal-Mart CEO sees recession change consumer habits.
• Money Morning News Analysis:
  International Retail Guru Michael Duke to Replace Lee Scott as Wal-Mart CEO.
• Money Morning Aftershock Investing Series:
  Will the Loss of Consumer Credit Serve as the Next Economic Aftershock to Further Fuel the Financial Crisis?
• Money Morning News Analysis:
  With Many Hits, Some Misses, Wal-Mart Searches for Success in the Global Economy.
• Apple.com:
  Apple iPhone.
• Android Community:
  Google Phone.
• Money Morning Outlook 2009 Series:
  Some Latin American Markets Show Profit Potential in the New Year, While Others Pose Risk.

** Special Note of Disclosure: Horacio Marquez holds no interest in Wal-Mart Co. Inc.