A focus on earnings
Clearly, the U.S. faces many long-term structural problems. But the stock market, which began its remarkable leap after investors concluded that economic Armageddon was no longer at hand, will advance as it responds to an improving earnings picture. And treading carefully amid the wreckage in the economy, investors can still find some alluring themes.
One idea is to invest in blue-chip companies with strong foreign sales. Mike Avery, co-manager of Ivy Asset Strategy, a global fund, hunts for “best in class” U.S. companies with strong overseas footprints. His U.S. multi-national holdings include Monsanto (symbol MON), Apple (AAPL) and Nike (NKE).
Channing Smith, co-manager of Capital Advisors, says he holds YUM Brands (YUM), which operates KFC and Pizza Hut restaurants, for its large and fast-growing China business. He gravitated toward Procter & Gamble (PG), which sells affordable necessities, such as diapers and razor blades, for similar reasons.
Information technology, an area in which the U.S. leads, also benefits from global economic recovery. Alan Gayle, senior investment strategist of SunTrust’s RidgeWorth Investments, says many tech giants have strong balance sheets with little debt and sport impressive profit margins. Stocks he likes include Adobe Systems (ADBE), Hewlett-Packard (HPQ) and Microsoft (MSFT).
Like the technology sector, the energy and materials industries generate the bulk of their sales abroad. But exports and overseas sales are only part of the story for these businesses. Commodities, such as oil and iron, are traded globally and priced in dollars, so if demand from emerging markets and a weak buck drive up prices, the natural-resources producers benefit.
Jerry Jordan, manager of Jordan Opportunity Fund, expects another onslaught of commodity-price inflation over the next couple of years — particularly in areas that have little new capacity coming on-stream, such as oil and copper. He likes oil-equipment and energy-services companies, including National Oilwell Varco (NOV) and Halliburton (HAL).
Jordan is also a bull on agriculture, reasoning that the rapidly rising consumption of animal protein in emerging markets will boost demand for grain used to feed livestock. His main plays on food are through a pork producer in China and through PowerShares DB Agriculture (DBA), an exchange-traded fund that holds futures contracts on grains and sugar. Rich Howard, co-manager of Prospector Opportunity, favors DuPont (DD). The chemical giant has a large and growing seed-technology business that competes with Monsanto’s.
Like many others worried about the health of the U.S. dollar and other major currencies, Howard has become a gold bug. He’s allocated 10% of his portfolio to mining stocks, including Barrick Gold (ABX) and Newmont Mining (NEM).
You can also profit from more domestically oriented stocks. Smith believes that companies such as Wal-Mart Stores (WMT) and PetSmart (PETM) will benefit from the new frugality of U.S. consumers (see What’s in Store for the Next Decade). He recently purchased shares of CarMax (KMX), the largest used-car retailer in the U.S. With just 2% of the national market, the company has plenty of room to expand.
Health care is a huge and growing domestic industry that’s difficult to ignore. But uncertainty about the direction of health-care reform makes investing tricky. Smith favors companies that will benefit from cost reduction and expanded insurance coverage, such as Quest Diagnostics (DGX), which provides testing services, and McKesson (MCK), a leading drug distributor. He’s also bullish on Abbott Laboratories (ABT), a diversified, steady grower that he considers undervalued.
You can, of course, invest in themes such as these through diversified funds. For instance, Fidelity Contrafund (FCNTX) and Selected American Shares (SLASX) are both stuffed with large, blue-chip U.S. companies with sturdy foreign franchises. For a fund tilted more toward tech and health stocks, consider Primecap Odyssey Growth (POGRX).
If you expect prices of oil, gold, grains and other stuff to continue to rise, you can invest through a fund such as Pimco CommodityRealReturn Strategy (PCRDX), which seeks to track commodity futures prices. Or you can buy into a fund such as T. Rowe Price New Era (PRNEX), which invests in stocks of natural-resources companies.
If all of the many risks out there scare you, then take a look at FPA Crescent (FPACX), which has the ability to sell stocks short (that is, bet on their share prices to fall) and to invest in bonds and bank loans. Crescent has a long history of enjoying most of the gains of bull markets and protecting capital during tough times.
