Inflation fears have rocked the market's boat. But your portfolio doesn't have to capsize. These five stocks should help you weather rough waters no matter what the Fed decides to do with interest rates. By Fred W. Frailey, Editor June 26, 2006 Are the market's ups and downs (and downs and downs) getting you down, too? Stocks the past month have been more volatile than at any time in the past three years. Wall Street is fixated on inflation -- in particular whether it's getting out of hand -- and every speck of information is immediately reflected in the stock market by raucous rallies or dismal declines. For investors unused to bungee-cord volatility, what's needed now is the calming influence of some ballast stocks. No, we're not recommending Florida Rock. What we do suggest, to limit your volatility, is that you load into your portfolio stocks that are resistant to oversized price swings, particularly swings pointed downward. Just as ballast in a ship's hold keeps the ship calm in rough waters, so will these stocks steady your investments, as well as your nerves, while the inflation bulls and bears fight it out. The good thing about the five ballast stocks we're suggesting is that you don't compromise future rewards by owning them. Each has excellent prospects, in addition to low volatility and resistance to downdrafts. RELATED STORIES Stock Watch Fund Watch The Best Online Broker So let's get started. The first thing to do is look at every stock and fund you own and ask three questions: First, do you remember why you bought it? Second, is that investment rationale still valid? And third, if this stock experienced a sharp decline, would you be willing to buy more shares? If you cannot answer yes, yes and yes to all three questions, then that stock or fund is a sell candidate. Now you've raised cash and are ready to buy ballast stocks. Beaten-down pharma stock Schering-Plough (symbol SGP) is a bombed-out stock. Everything that could go wrong did. Its blockbuster drug, Claritin, lost patent protection and was reclassified as over the counter. Government inspectors found unsafe conditions in four manufacturing plants. And Schering didn't have much in its new-drug pipeline. The stock has traded just above or under $20 for almost four years, versus $60 in late 2000. But low expectations helped Schering Plough weather the market's downdraft during May and June handily. The stock merely bounced between $18.50 and $19.50. Advertisement And now things are starting to go right. In partnership with Merck, Schering markets the anti-cholesterol drug Vytorim. You've seen the hokey commercials ("Cholesterol not only comes from a hot dog, but your Uncle Doug"), and Vytorim is selling "extraordinarily well," in the words of Prudential Equity analyst Tim Anderson. New drugs to fight hepatitis C, HIV/AIDS, heart disease and other problems are under development or in human trials. Plus, the company is closing or downsizing plants in Puerto Rico and New Jersey, lowering expenses by $100 million a year. Analyst estimates for 2006 earnings are all over the map. At the low end, Standard Poor's says 58 cents a share (versus 37 cents in 2005). Pru's Anderson is at the high end, at 90 cents. What they all agree on is that Schering Plough is on the way up, maybe not like a rocket, but up. SP has a 12-month price target of $22, Prudential $23 and Merrill Lynch $24. Tough tobacco At first glance, Altria (MO) would seem a controversial ballast stock. The former Philip Morris remains in the gun sights of the personal-injury bar. And cigarette smoking is definitely on the decline in the U.S. But Teflon-clad Altria seems almost litigation-proof, the $29 billion a year in excise taxes it pays in the U.S. make it almost a partner of government, and it continues to dominate the world tobacco business, with six of the 20 best-selling brands. The weak stock market of this past month didn't lay a glove on Altria's shares. Meanwhile, the company appears nearer a total spinoff of its food and beer units, which would help it attain Morningstar's fair market value of $84 a share, versus today's $73. And the money keeps rolling in, not just from cigarette sales, either. A $1-billion set-aside for possible taxes was returned to the company's treasury after an IRS audit. And the Illinois Supreme Court ordered the return of almost $2.2 billion in cash that the company used to secure the appeal of an adverse court case that Philip Morris subsequently won. Altria earned $5.12 per share in 2005. Merrill analyst Christine Farkas estimates earnings of $5.25 this year and $5.50 next year, giving it a price-earnings ratio of less than 14 based on this year's profits. The stock recently traded at $72 and yields a generous 4.5%. Advertisement Banking gem From that steel-makin' town, Birmingham, Ala., comes the best little banking stock in Texas. While Compass Bancshares (CBSS) may be headquartered in Alabama, almost half of its branches are in key Texas cities, such as Austin, Dallas and Houston. In the opinion of Citigroup analyst Michael Diana, this makes the company an excellent takeover target for even bigger banks wanting to make a move into the Lone Star State (SunTrust, for example) or for giants who want to solidify their already large Texas positions (Wells Fargo and J.P. Morgan Chase). While you wait for the bidding to start, enjoy the 2.8% yield thrown off by the bank's $1.40-per-share dividend and Compass's enviable growth rate. Over the past ten years, loans have risen at a 10% annualized rate, while revenue, earnings and the dividend all grew 11% compounded. Diana projects earnings of $3.60 a share this year (versus $3.18 in 2005) and $3.90 next. The stock trades at $55. As for that recent unpleasantness in the stock market, a Compass shareholder might ask, What unpleasantness? Grocery-cart staple Light ... crisp ... refreshing. It's on every can of Diet Pepsi, but you could as easily achieve the same relaxed feeling by owning PepsiCo stock (PEP). The shares have tripled in the past decade, and they barely budged when the market turned south in May and June. In addition to the flagship Pepsi drink, the list of brands in its formidable portfolio includes Fritos, Quaker Oats, Mountain Dew, Gatorade, Tropicana and Aquafina. This year, Pepsico raised its dividend by 15%, to an annual rate of $1.20 a share. At $59, the stock yields 2%. In addition to rising profits, a vigorous share-buyback program, amounting to $3 billion in both 2005 and 2006, also supports the shares (the same profit spread over fewer outstanding shares equals a higher profit per share). Citigroup's Bonnie Herzog, who rates the stock a buy, is particularly impressed by the Frito-Lay snack-food business, which she says is "running full steam." Herzog has a target price of $69. Analysts, on average, estimate that PepsiCo will earn $2.95 a share this year, versus an actual $2.66 in 2005, and $3.27 in 2007. Advertisement Discounted discounter Wal-Mart Stores (WMT) is a "company in transformation," to quote Citigroup's Deborah Weinswig. The retailing giant's "Out in Front" initiative is designed to broaden the company's appeal to consumers, make it a better place to work, improve its efficiency, drive its expansion outside the U.S. and "allow it to make unique contributions to the community." What's not to like about all that? Weinswig believes that changes taking place within the company will take Wal-Mart "to the next level of growth and profitability." It's also worth noting that a Merrill Lynch survey in the New York-New Jersey area finds that Wal-Mart significantly underprices rival big-box retailer Target. Wal-Mart shares actually went up during the May-June correction, an indication of the company's momentum. The stock is at $48, but Citigroup believes it capable of reach $60 by 2007, and Buckingham Research Group has a $62 target. The company earned $2.65 a share in fiscal 2006, which ended last January. At recent prices, the stock sells for just 16 times Weinswig's earnings estimate of $2.95 a share for the fiscal year ending this January. That's barely more than the market's overall price-earnings ratio. Wal-Mart has historically traded at a much higher P/E than the market.