By Stockpickr Guest Columnist Doug Hall

In the “olden days,” families used to all take a bath using the same tub of water. The last one was the baby of the family. By then, the water could be so dirty that you had to be careful or you might “throw out the baby with the bath water.” That phrase has come to mean throwing out the good stuff with the bad stuff.

The stock market has been taking a bath lately, and right now the water is full of babies being thrown out with the trash. If you’ve got any money left, it may be time to start picking up some good companies selling for ridiculously cheap prices.

Look for strong companies with solid fundamentals. My analysis method relies on historically reported data (revenue and earnings) tempered by some qualitative analysis. The historical data I have used previously has not yet changed, though some qualitative reassessment may be in order.

I stand behind my previous analysis of Pepsi (PEP) and Coca-Cola (KO); people are going to drink soda, even if in front of their old TV rather than a new one. And today you can steal even more steel companies than you could three weeks ago; governments around the world continue to build bridges and skyscrapers. And Baidu.com (BIDU) and Central European Distribution (CEDC) are probably suffering just because they are smaller and less well-known, not because Chinese citizens stopped surfing the Web or Poles stopped drinking vodka.

The Dow Jones Industrial Average is composed of companies intended to represent a cross section of American business, though that could be debated. So look at companies in the DJIA. All are well-known, and many are very stable with predictable revenue streams. Caterpillar (CAT), United Technologies (UTX), Microsoft (MSFT), Wal-Mart (WMT), Procter & Gamble (PG), Hewlett-Packard (HPQ), 3M (MMM) and Johnson & Johnson (JNJ) revenues fit my seasonal model very well, accounting for 95% of the variation over the last six years. Others do not: Revenues of American Express (AXP), General Motors (GM) and AIG (AIG) are more random, with the model fitting less than 20% of that scatter. AIG was recently kicked out for demonstrating just how badly a company can be run. But looking at my analysis, no one should be surprised that its stock is now worth a fraction of its peak.

Caterpillar has dropped more than $25 from its summer peak, but little has changed to make me fear for its future. Caterpillar's bulldozers and other construction equipment are made, sold and used around the world. The Indian and Chinese economies have not collapsed. The need for roads in Bangalore has not diminished, according to my colleagues in that city. While China is done with its Olympic-sized building boom, it still needs roads, bridges and dams.

Caterpillar has been growing at 18% per year for the last six years. At $56, it trades for 8.7 times trailing earnings. If history repeats itself, Caterpillar should sell for a lot more. My analysis predicts a 12-month target approaching $200. Buy 100 shares. Sell 50 at $120. Leave the “house money” on the table.

United Technologies is a very well-run company, with huge market share where it competes with leading brands such as Otis Elevators, Carrier HVAC, Sikorsky helicopters and Pratt & Whitney jet engines. The company is better off than many others. Company revenues are less volatile due to its wisely operated diversified portfolio of business. It’s a mutual fund all by itself. United Technologies' business diversity lowers risk and growth. With a reliable 15%-per-year growth rate, it still trades for only 12.5 times trailing earnings. Buy now with a goal of selling $120 within the next 1 to 2 years.

My analysis may seem rather simplistic to some of those analysts on Wall Street, but don’t forget, the people who got is into this mess are supposed to be rocket scientists. I’m for real. It’s time to start nibbling at the edges, watching for accumulation and then sitting back to wait for the inevitable recovery of the strongest economy in the world.

Disclosure: My household and my investment club own shares of Caterpillar. United Technologies buys the things I design. I did not analyze my employer, Honeywell International, when preparing this column. I still own BIDU, CEDC, ENS, PEP, and STLD mentioned in previous columns. Having once worked on the Atlas V launch platform and the HyFly cruise missle, I really am a rocket scientist.

Posted on Oct. 5, 2008