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Paul Sullivan

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Get out the mops and pails

Paul Sullivan

It is spring, I think, although as I write this in early April, it's snowing outside my office window here in Vancouver.

By all accounts, however, spring will come, and the longest, coldest winter of our times will finally be over. It is now spring cleaning time: time to fling open the windows, get out the mops and pails, and clean up our moldy old portfolios.

But what should we send to the curb and what should we keep? There's no shortage of advice, much of it from the same people who advised us to buy and hold through the worst market slump since the Dirty Thirties. The last two bear markets, in 03 and now this one, have wiped out all the gains of the past decade, and investors who followed "buy and hold" through thick and thin have lost half the value of their portfolios. It's time to send those bowsers back to the pound.

One perpetually flinty-eyed short-seller has been fund manager and market bear Eric Sprott. The Globe's Brian Milner asked him recently what's on his chopping block these days. "You know that pretty well that anybody who's related to the economy cannot be doing well," he said. The company he cites, Caterpillar, is what he calls a classic example. "Whether it's airplanes, front-end loaders, the orders just get cancelled, because there's enough equipment around already."

So you could listen to the Eric Sprotts of the world — there's certainly no shortage of stocks that are candidates for selling short. But we don't want to ignore opportunities and like daffodils struggling to bloom in the frigid air, there are some of those right under our noses.

Take airplanes, for example. What do you say about Bombardier (BBD.B: TSX), which is all about airplanes, but far from cancelling orders, is taking them at an unprecedented rate? A couple of weeks ago, Lufthansa announced it was ordering 30 of Bombardier's new CSeries shorthaul jet, and Lease Corp International Inc. has just signed an order for 20 more, a total investment of nearly $3 billion.

Bombardier is trading at about $3 a share and has a long and troubled history. But if it is able to exploit the economy by finding its niche, rather than depending on its capacity to expand, you have to wonder if it's not finally springtime for Bombardier.

It is always a good idea to stay clear-eyed about individual stocks. Don't get emotionally involved, but that also means don't overlook opportunities. I'm not saying it's time to buy Bombardier, but maybe it is. And maybe it is time to look at individual stocks again, and leave the ETFs alone for a while.

If you're a little skittish about this kind of stock picking, start conservatively: companies with little debt, strong balance sheets and good management don't always prosper, but they always do better than companies burdened with debt, weak balance sheets and erratic or dishonest management. And the more you know about a company, the less likely you are to miss those skeletons rumbling around in the closet.

So, here's what I'm going to do. I'm only looking at companies I know and I like. And I like Costco (NASDAQ: COST). I've always liked Costco, because I love bargains, and I like Costco even more now because its model helps consumers save money while encouraging them to buy. Talk about a stock with "spring" in its step.

I shop at Costco once a week, so I'm familiar with the membership retailer on a consumer level. They send me real savings in the mail and via email, actual bargains on stuff I use everyday. An alert shopper can save a lot of money at Costco, and as saving money is the new black, I have a strong feeling that at $46.50, this stock is as cheap as the stuff on the racks.

Another store I shop at doesn't even exist in the real world and these days, that's a plus. Amazon.ca is the Canadian version of the US parent, and it's a mere shadow of the e-commerce pioneer from Seattle. At Amazon.com (NASDAQ: AMZN), you can literally buy anything…at prices that compete with and in many case surpass Walmart. The stock is a little pricey at $73.45 US, but if there's ever a company that's in tune with the times, it's Amazon. And the numbers compare well, even to Costco: the shares sell at 20 times the company's 2008 free cash flow of $1.36 billion, while Costco's free cash flow multiple is 25.4.

While outfits like Linens 'N Things are leaving big black holes in malls, Amazon's working on all of its virtual fronts. It had a great Christmas season, and has its eye on the horizon in ways that remind you of that other tech wunderkind, Apple. Amazon, for example, has apparently invested the first paperless book that people will actually buy. It's called the Kindle, and so far, Amazon has sold 350,000 of the 2.0 version. But the news I find really exciting is that Amazon has finally figured out how to make real money on the Internet, in the form of cloud computing.

Amazon Simple DB is an example. Instead of buying and installing a software database, you store your data in the "cloud", remotely with Amazon. Eventually, no one will have an IT department, and we'll all work on the Internet. This software will never become obsolete or corrupt, and Amazon is the leader in the development of cloud computing. The good news? Neither the Kindle nor cloud computing are reflected in the share price. More good news? Amazon just made the cover of Barron's as "The World's Best Retailer."

Fool us once and shame on you, fool us twice, and well. … This meltdown has been a wake-up call for investors, who have to clean out their heads as well as their portfolios.

I love what Todd Harrison of MarketWatch.com has to say: "profiting is a privilege rather than a right". That was not a common sentiment in even in the summer of 2008. Now that greed is not good after all, it's going to be harder to make magic profits, which means we'll have to invest in real growth and real value — and we're going to trust ourselves, not someone's nephew, to take care of our portfolios. Listen to the experts, but exploit your own personal knowledge bank.

Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.

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