It covers a multitude of sins

It's interesting to me how the earnings reports of some of the best companies are surprising my breathern on Wall Street. Look at Macy's. Look at Dell. Look at The Gap. Look at this recession's poster child, Wal-Mart. Their sales weren't nearly where they needed to be, but the bottom line number was fabulous, just fabulous. The Wall Street Wonks are scratching their heads, trying to figure out how their channel checks could have lead the some wrong.

As I've been saying over and over again lately, in this market it is all about the best operators. Can they control their expenses? Have they looked at every possible option for reducing their Cost of Goods Sold? Are they maximizing their sales per square foot? Have they gotten creative with their marketing, luring people into the stores with low margin stuff, then selling them some attractive higher margin items too?

The best companies know which levers they can pull in bad economic times, and those levers aren't something new to them. The best companies are led by management teams that understand that if the only way you can grow your earnings is through building more stores or selling more stuff, you're holding a pretty weak hand in the poker game that is global capitalism.

In this kind of market, I want to own companies holding 4 aces. These companies exist, but you need to look closely at how they've managed their businesses historically as well as currently. As Warren Buffett has been quoted, it's only when the tide goes out that you see who has been swimming naked. Avoid naked capitalism! Buy companies that have covered their backsides... and yours... well.