12 stocks for a slow-moving recovery
It seems the bounce-back has begun, but the U.S. economy won't really get cooking for some time. These stocks should race ahead of the pack.
From brainy Ph.D. economists on Wall Street to the guy uptown who cuts what's left of my hair, a broad range of market pundits agree:
The comeback has begun.
But while the U.S. economy is improving, it's not shooting back to the rollicking days of the bubble years.
Loans, the rocket fuel of capitalism, will remain hard to get for some time. Money lenders, business leaders and consumers are going to remain cautious.The most probable scenario now is what I'll call a slow-burn recovery. "People are retrenching, and it is not going to turn around quickly. We have gutted this economy," says Jack Adamo, who pens Insiders Plus, a top-ranked stock newsletter.
Mark Zandi, the chief economist for Moody's Economy.com, predicts a flat U.S. economy next year and moderate growth in 2011. We won't see full employment until the second half of 2013, Zandi says.
In a slow-burn recovery, strictly defensive stocks selling day-to-day necessities, such as Procter & Gamble (PG.N), will be a drag on your portfolio. Nor do you want too many hyper-cyclical stocks, in areas like tech, that outshine the most during times of red-hot economic growth, something we won't see.
Instead, you need to pick companies with qualities that'll let them rise fast despite a slow-burn recovery. These include:
* Companies that offer cheap entertainment, such as video-game retailer GameStop (GME.N).
* Those that control their own destinies, like Lockheed Martin (LMT.N).
* Reliable performers such as toolmaker Snap-on (SNA.N) and uniform seller Cintas (CTAS.O).
* High-yield plays like Annaly Capital Management (NLYBP.N).
* Education plays that benefit as people retool for a tougher labour market, like Corinthian Colleges (COCO.O).
Here's a closer look at stocks for a slow-burn recovery.
Despite the depressing side of life during a recession, the U.S. hasn't turned into a nation of Debbie Downers and Buddhist minimalists. Americans like to have fun - but just want to pay less for it.
"People are looking for cheaper entertainment," says fund manager Don Hodges of the Hodges Fund (HDPMX). Two stock plays on this trend are GameStop and Coinstar (CSTR.O), he says.
GameStop shows that video games aren't just for pimply kids who need to get lives. Thanks to Wii Sports, Halo, Mario and other hit games, Americans of virtually all ages spend $22 billion a year to give their thumbs a workout on more than 185 million consoles. The average player in the U.S. is now 35 years old; 25% of people over 50 play video games. And 40% of gamers are female.
Games seem to be a popular escape during the economic pullback; fourth-quarter sales at the GameStop retail chain shot up 22% to $3.5 billion. "Video games are viewed as relatively cheap entertainment," GameStop chief Daniel DeMatteo said in the company's most recent conference call.Recession-pinched gamers are fans of GameStop partly because it sells used games and accepts used games for credit toward purchases. Second-hand games generate more than 40% of GameStop's profits. The chain sells consoles and games at more than 6,200 stores, mainly in the U.S. But it's also in Canada, Europe and Australia. Digital distribution of games looms as a risk to GameStop, but that's still far off, Morningstar analyst Sunit Gogia says.
Coinstar's business niche is that dead zone in stores between the cash registers and the front door -- known in retailing as the "fourth wall." Coinstar partly fills that space with mundane coin-counting machines.But it also puts in rides for kids, vending machines and those notorious crane games that tease money out of your wallet in exchange for the frustration of leaving a teddy bear perched on the rim of the exit chute.
Coinstar has these kinds of machines in more than 90,000 stores, banks and restaurants, but the one that's really bringing in the bucks right now is a DVD kiosk called Redbox. It lets customers rent movies for a mere $1 a night. The rental converts into a purchase for $25 if you keep a DVD for 25 days. Redbox revenue grew 52% last year and constituted 20% of Coinstar's revenue.
The company expects Redbox sales to grow 80% this year; it may bring in as much as $750 million.
The future in their own hands
Companies that have decent control over their own destinies are another group that should outshine in a slow-burn recovery, says Todd Lowenstein, a portfolio manager at the HighMark Value Momentum Fund (HMVLX). After all, they don't depend as much on an economic rebound for growth. Lowenstein thinks Lockheed Martin and drugstore chain Walgreen (WAG.N) fit the bill -- one reason he's recently been buying them.Lockheed Martin is the largest defence contractor in the world and the technological leader in many of its product lines, from aircraft and missiles to electronics.
Hands down, the most important demonstration of this leadership was Lockheed's win on the F-35 stealth fighter jet program. Over the next several years, the F-35 will replace an aging fleet of Air Force F-16 jets, Navy F/A-18 jets and the AV-8B aircraft used by the Marines.
The F-35 project may be worth up to $1 trillion in sales and will drive earnings growth for years. "This story turns on the F-35," Lowenstein says.
Because Lockheed Martin typically signs contracts that last for years, it's less vulnerable to the whims of the economy or the "supplemental" military budgets that are wrangled each year to fund specific conflicts in areas such as Iraq or Afghanistan.
Walgreen, like McDonald's (MCD.N) earlier this decade, has made the mistake of trying to grow too fast. But just as McDonald's did, Walgreen has decided to slow down. It's streamlining product offerings, giving customers a better experience and cutting costs.This strategy worked wonders at McDonald's. The fast-food chain's stock more than doubled in the three years since I wrote about its turnaround efforts in May 2005. Lowenstein expects the same sort of results out of Walgreen.
Reliable plays for rocky times
Companies that have a long history of reliable earnings and sales growth should keep their stride in a slow-burn recovery.
To find them, I turned to John Reese of Validea, whose computers imitate great investment gurus like Warren Buffett and Benjamin Graham, the "father of value investing" who taught Buffett at Columbia Business School decades ago. Validea's Graham algorithm looks for low-debt companies that'll avoid trouble refinancing debt at a time when lending is tight.So far, the Graham portfolio is doing well in the slow-burn recovery. Validea's Graham picks were up 15% this year, as of April 29, compared with a 3.4% decline for the S&P 500 Index ($US:INX). (It's also up 123% since Validea launched the guru portfolios in July 2003, compared with a loss of 12.8% for the S&P 500.)
"This strategy gets to the heart of what makes a business successful," Reese says.Companies that recently came into favour in include Snap-on, Cintas, health care product maker Zimmer (ZMH.N) and Northwest Pipe (NWPX.O).
Go for the dividend
Because it may be a long time before the U.S. economy sees robust growth, Insiders Plus' Adamo wants to get paid to wait. His favourite investments offer supercharged dividends and have the strength and backing to keep paying them.
"I'm all about a combination of yield and safety," he says.Adamo, an accounting expert, knows how to size up financial safety. His investment newsletter gets a very high score for long-term returns from Hulbert Financial Digest, which tracks such newsletters.Adamo's favourite high-yield play is Annaly Capital Management. It's a real-estate investment trust that manages a portfolio of mortgaged-backed securities. Yes, that's the toxic stuff that has everyone worried. But not all of it is bad, and Adamo believes Annaly's portfolio is safe. Its securities have the implicit guarantee of the U.S. government, because holdings are backed by Fannie Mae (FNM.N) and Freddie Mac (FRE.N).Adamo also likes the preferred stock of the agricultural play Bunge (BGEPF.PK.N), which pays a 6.5% dividend yield.
In slowdowns, people put their dreams of becoming the next big fashion designer on hold and develop hard skills that they can sell in the job market. They look to develop skills like helping in hospitals or fixing air conditioning and heating.
So education programs offering training in such skilled trades outdraw the "passion programs" in fields such as cooking, art or design, says Jeffrey Silber, who covers the sector for BMO Financial Group.
Silber says two private education companies well-positioned to play this trend are Corinthian Colleges and Lincoln Educational Services (LINC.O).
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.
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