The Wall Street Journal-20080112-Green Thumb- Classic Playbook May Not Work In This Climate
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Green Thumb: Classic Playbook May Not Work In This Climate
Recession fears are mounting -- but this time, stock-market investors looking for havens need to think differently.
The classic playbook is to move into giant companies that make stuff people need even in bad times -- medicines, consumer staples, utilities. Ditch luxury-goods and construction-equipment stocks, since there's less demand for their products.
It's tricky to follow that advice today. Utilities, for instance, are already looking pricey as investors fled to safety in recent months. And consumer-goods makers face high energy and raw-materials costs -- thanks to booming commodities prices -- which could squeeze profits.
Meantime, some stocks that you would expect to take hits in a downturn, such as technology, look more like buys, especially after getting slammed in recent weeks. Charles Schwab Corp. recently started telling investors to grab tech stocks, citing in part their exposure to still-hot overseas markets.
Companies that make videogames and provide wireless data and Internet services should also hold up relatively well: They're still seeing growth even as the economy slows, says Dan Chung of Fred Alger Management Inc.
Recently released economic data, such as the jump in the unemployment rate, are heightening fears of recession, typically defined as at least two straight quarters of negative economic growth. Economists at Goldman Sachs Group Inc. and Merrill Lynch & Co. have said a U.S. recession is in the cards.
The stocks of banks and other financial firms are normally off most "buy" lists during economic weakening, amid rising deliquencies. But shares of financial-services firms have gotten so hammered in recent months, it has created opportunities for investors to buy big-name banks and other firms at steep discounts.
Earnings estimates have been slashed and investor sentiment is low -- usually indicators that it's time for investors to wade back in, says Tobias Levkovich of Citigroup Inc. Plus, any additional interest- rate cuts by the Federal Reserve should bolster interest-rate- sensitive areas such as financial stocks, since lower rates help their profitability. Just this past week, the Fed signaled that big interest-rate cuts are coming.
Investors need to be selective. Goldman includes a conservatively run bank, U.S. Bancorp, in its "recession protection" basket. Elizabeth Bramwell of Sentinel Asset Management Inc., a unit of National Life Group, still holds BlackRock Inc. and CME Group Inc., which runs the Chicago Mercantile Exchange and the Chicago Board of Trade. BlackRock is a "well-run" money-management firm with global operations and solid risk-management tools, she says, while CME should benefit from the growing trade in futures and options contracts.
This can be a game for risk takers. Goldman Sachs portfolio strategist David Kostin still expects more bad news from the financial sector.
He says it's hard to argue that financials, as a group, are a bargain when the extent of the recent credit-market fallout remains murky.
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Safety First
Amid a slowing economy, investors may reconsider traditional
havens:
-- Health-care stocks are still good buys, although
utilities look pricey.
-- Consider beaten-up techs, financials.
-- Look for consumer firms with big overseas units.
