Great companies are selling at bargain prices. Now's the time to load up.
Great companies are selling at bargain prices. Now's the time to load up.
The stock market hit rocky times well before the September terrorist attacks threw the economy into even greater uncertainty. Yet most analysts believe that despite the market'sand the country'swoes, now's not the time to shy away from investing.
On the contrary, because many companies' share prices have dropped dramatically since the market peak of 2000, it's a good time to buy stocks of solid companies with commonsense business plans, many say. "While investors should continue to be cautious, you want to buy straw hats in January," says Kenneth Shea, director of equity research at Standard & Poor's. Shea is one of three veteran stock pickers who shared with us the names of the stocks they think will be most profitable for the long term (see "10 Great Stock Opportunities").
In discussing their recommendations, our experts explained that the best prospects are companies that have been pummeled by the market downturn but that still have the proven potential to deliver growthunlike many companies whose stocks have been beaten down for good reason.
"We don't like value stocks that will always be value stocks," says Mark Henneman, a portfolio manager at US Bancorp Piper Jaffray, in Minneapolis. "Companies need to be able to roll out of whatever near-term problems they have and start bringing in profits." Adds Karey Barker, a portfolio manager at Wasatch Advisors in Salt Lake City: "Buying good companies at a reasonable value is a fundamental philosophy that doesn't change with the market. We look at the price certain companies have traded for historically, and try to stay within that range. This philosophy tends to put you in more rationally valued sectors for the medium and long term."
The most promising companies also address a need that's in line with economic or demographic trends. Moreover, they're leaders in their sectors in terms of product quality and innovation, and they have experienced management teams that can solve problems and effectively lead the way through tough times.
Shea pointed to four large-cap companies that he believes fit these criteria. Henneman recommended three mid-caps, and Barker three small-caps. Here are their choices.
This contract pharmacy provides specialized drug delivery and support to patients using expensive medications for serious conditions, including growth hormone deficiency, multiple sclerosis, Crohn's disease, rheumatoid arthritis, hemophilia, and various immune deficiencies. Accredo Health works only with patients using drugs that cost $6,000 to $200,000 a year. The drugs, all injectables, are delivered to patients' homes by FedEx, in refrigerated containers. Accredo Health pharmacists can tell patients how to use the drugs, and follow up, when needed, by phone.
Biogen, Genzyme, and Genentech have long-term preferred relationships with Accredo Health. "It's the best of the specialty drug delivery companies," says Barker. "I think it can grow at least 35 percent a year for the next five years." The stock is relatively expensive at the moment, Barker says, but management quality makes it something that investors "can put away for 10 yearsand probably do really well with."
Brewer of Budweiser, the world's best-selling beer, Anheuser-Busch owns 48 percent of the US beer market. Economies of scale have made it one of the lowest-cost producers in the US.
"The company is a legendary innovator," notes Shea. "It developed the first nationally marketed beer and has followed up with other innovations." When micro-breweries appeared, the company produced its own knock-off custom beers. When Mexican imports such as Corona became popular, Anheuser-Busch introduced Tequiza, a tequila-flavored brew. The company uses its tremendous leverage among distributors to bring products to the market.
Anheuser-Busch also owns amusement parks, including SeaWorld and Water Country USA, which have seen gains in attendance and revenue from in-park spending. Total returns have averaged 20 percent annually over the past five years and reached 30.5 percent in 2000. This year, through Oct. 8, the stock has been down 11.7 percent, but has still beat the S & P 500 Stock Index, which lost 19.5.
Privatized since 1995, CN is now the only transcontinental railroad in North America, operating coast to coast and from Canada to the Gulf of Mexico. It acquired the Illinois Central line in 1999.
CN hauls coal, chemicals, petroleum, grain, fertilizers, lumber, and cars, offering the cheap rates that bulk rail shippers value. Its competitive edge is its efficient operation: The company's operating ratioa widely used standard of efficiencyis the lowest among all Class 1 railroads. During the tech boom, investors showed little interest in CN's steady growth, which didn't compare with tech stock returns. Now, its relatively low price-earnings ratio, combined with the 10 to 12 percent annual growth Shea predicts, should give its stock appeal. "This is a very safe way for an investor to get some steady, low-teen rates of appreciation," he says.
CN is the only railroad that connects all three NAFTA partners. It's also in a position to benefit from the ongoing consolidation of North American railroads, because it generates a lot of cash and can exploit acquisition opportunities.
Schools are seldom run like businesses, but Career Education sets out to manage them that way. Founded in 1994, the Illinois-based company operates 38 campusesin the United States, Canada, the United Kingdom, and the United Arab Emiratesthat offer secondary degrees in career-focused areas, such as design, communications and information technologies, business, and culinary arts. The company runs seven campuses of Le Cordon Bleu Culinary Program North America.
"Career Education is a company that has proven itself," says Barker. "There's a real opportunity for its high-quality management to professionalize the industry." Revenues and earnings per share are up more than 64 and 83 percent, respectivelya pace the company could maintain if it continues to acquire other specialty schools, says Barker. But even if it doesn't, it could sustain 20 percent growth annually with the schools it owns now, she predicts.
This veteran communications-equipment maker may be ready to shine, says Henneman. Founded in 1895, Harris produces a diverse range of electronic communications products, including antennas, digital microwave radios, and various communication systems for satellites and the space shuttles.
In recent years, more than 40 percent of the company's business has been defense contractsincluding the National Missile Defense Program, better known as Star Wars. Harris' work for the Pentagon and the high quality of its products have kept the firm relatively insulated from the economic downturn, says Henneman. Harris is already in line for more defense contracts and should benefit even more from upcoming increases in defense spending.
Eventually, though, HDTV could be a much bigger growth area. Harris has been in a slump since its big bet on high-definition TV stalled. But the Federal Communications Commission has recently cleared away obstacles to the switch to HDTV. Harris already supplies more than 60 percent of all digital transmitters to US TV stations, which have only begun to buy HDTV equipment. Yet even if that rollout still comes slowly, says Henneman, "this is a company that seems to prosper in any economic environment."
Marathon Oil has expanded from exploration and production to refining, retail, and crude-oil transportation through a vast web of interstate pipelines. USX, the parent company, intends to completely spin off Marathon Oil in January 2002. Henneman predicts that this return to independence will bump up the price of Marathon's stock.
He also expects a general increase in energy prices in the near term, particularly in light of the tensions between the United States and some Mideast countries. "So the company participates in a more favorable energy market, and you get a kicker on top of that," he says. Although the energy sector is cyclical and bumpy, Marathon Oil's integrated operations have kept it more stable than most of its competitors. Henneman expects at least 15 to 20 percent annual earnings growth over the next few years.
This sprawling company has a powerful worldwide franchise not only in beverage brands ranging from Pepsi to Tropicana juices, but in its highly profitable Frito-Lay division, which makes popular snacks. This year, PepsiCo merged with The Quaker Oats Company, producer of Gatorade, another strong brand. PepsiCo expects to reap $400 million just from consolidating some operations of the two companies.
With its worldwide distribution system, PepsiCo will also be much better able to market Gatorade in Latin America and Asia, as well as other regions, Shea predicts. Meanwhile, following Coke's lead, the company has shed its bottling operations and instead focused on the sale of high-margin beverage concentrate. "They let the bottlers deal with trucking and other asset-intensive, low-margin business," says Shea. "This looks like an easy win for investors." Shea anticipates annual earnings growth of at least 10 to 15 percent over the next few years.
SPX, which operates in 34 countries, produces technical and industrial products, including institutional fire-detection systems, TV broadcast antennas, and large power transformers and substations. It also makes filters and repair kits for auto transmissions.
In 1998, SPX bought much larger General Signal, already a multi-industry manufacturer. In 2000, SPX completed 20 acquisitions. Earlier this year, it bought two more companies, and it's still looking for more. The CEO, president, and chairman behind the expansion is John B. Blystone, a veteran General Electric executive, who took over SPX in 1995. The stock's price has risen more than 700 percent since Blystone arrived, though it stumbled with the market downturn. Henneman expects nearly 20 percent earnings growth for SPX when the economy turns around.
Few semiconductor businesses have had the stamina of Texas Instruments. The company has produced a long line of industry-changing innovations, including the first integrated circuit and the first handheld electronic calculator. Today, it focuses on digital signal processor chips and the associated technologies crucial to manipulating sound, video, and other signals used in consumer and network electronicsfrom wireless cellular phones, to digital cameras and Internet music devices, to broadband modems.
More narrowly focused tech hardware companies may rise or fall on the success of a single product or technology, but not TI; its chips are part of virtually every consumer electronic device now on the market or destined for the market. "It's a high-quality company with its hands in a lot of good growth areas," says Shea. "Even in a bad year, like this one, it still generates a lot of cash flow. TI is a good long-term investment."
This San Diego-based company designs, sets up, and manages wireless telephone networks for major carriers, including AT&T Wireless, Cingular Wireless, Sprint PCS, and Verizon Wireless. Founded in 1994, Wireless Facilities now operates in 107 countries.
The telecom collapse hit the company's stock price hard. "Wireless carriers were very afraid, because they had never been through a bad economy before," says Barker. Nevertheless, wireless phone use has increased, and Barker expects Wireless Facilitiesa service company with a strong employee base of specialized engineersto rebound quickly. "It has shown us that it can be profitable even with lower revenues than it had at its previous peak," she says.
Barker expects the company to post a long-term annual growth rate of 30 percent, not counting what it stands to reap in the coming rollout of data services over cell phones during the next five years. "And it's a good price opportunity right now," she says.
Kenneth Shea, formerly a food, beverage, and tobacco analyst for Standard & Poor's, is now its director of equity research and oversees more than 50 stock analysts. He's also a member of S&P's Investment Policy Committee, which provides a weekly assessment of the state of the US equity markets and develops S&P's collective financial markets forecast.
Mark Henneman is the lead portfolio manager of the First American Mid Cap Value Fund at US Bancorp Piper Jaffray, in Minneapolis. The fund chalked up a 20.9 percent return to investors in 2000, compared with the Russell Midcap Value index return of 19.2 percent and the Lipper Mid Cap Value Category average return of 10.6 percent. Henneman has more than nine years' experience managing equity investments.
Karey Barker is a portfolio manager at Wasatch Advisors, a small mutual fund company in Salt Lake City specializing in investments in small- and mid-size companies. She manages the Wasatch Ultra Growth Fund and the new Wasatch Global Technology Fund. The Ultra Growth Fund had a three-year average annualized return of 22.3 percent as of Sept. 30, 2001, beating the Russell 2000 Growth Index by 22.7 percentage points.
Michael Parrish. Snap up these stocks. Medical Economics 2001;21:65.