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Abandoning stocks is not your best response to the turmoil gripping the markets. Instead, we suggest you find ports in the storm that will keep your money relatively safe while giving your portfolio a fighting chance to grow, even through this economic downturn.
What kinds of stocks are we talking about? Cheap ones. As recession fears rise and credit woes deepen, price-earnings ratios are shrinking. But even stocks with low P/Es are vulnerable if a recession cuts into profits, so you want a solid business with a breadth of profit centers.
In this environment, big is certainly better. A fortified balance sheet is also a must -- this is no time for a company to need to borrow money or issue new shares. And even though their prices may look tempting, we would avoid financial and housing stocks for now. Below are five attractively priced stocks we think meet all these criteria.
eBay (symbol EBAY)
EBay has been pummeled lately because growth has been slowing in its famous online-auction business. Granted, the company will never be the growth stock it once was, but eBay is too cheap to pass up at a measly nine times expected 2009 earnings of $1.90 per share (all prices are to October 13). "At 20 or 25 times earnings, you could argue whether it's an attractive stock," says Larry Coats, manager of Oak Value fund. "But at these levels, there shouldn't be a whole lot of debate."
Auctions account for only about one-third of revenues, and eBay has plenty of other businesses that are growing at a breakneck pace. PayPal, the online-payments system, saw its second-quarter revenues rise 33% from the same period in 2007, and revenues from Internet phone service Skype were up 51%. Together, these two businesses also account for a third of eBay's revenues.
Other bright spots include ticket seller StubHub, shopping sites such as Shopping.com, and several classified-advertising sites. Moreover, eBay announced on October 6 that it will buy Bill Me Later, a service similar to PayPal that large retailers favor, for $945 million. Although some of these businesses don't have the profit margins of the auction business, analysts still expect overall earnings growth of 14% in 2008 and 10% next year -- not bad considering anemic consumer-spending forecasts.
EBay's financial strength should allow shareholders to relax and wait. It has no debt and $3.7 billion in the bank, and it generates $2 billion annually in free cash flow (earnings plus depreciation and other noncash expenses, minus expenditures to maintain and expand the business).
AT&T (T)
Like eBay, AT&T has fallen from favor because of slowing growth in a core business -- in this case, old-fashioned, wire-line phone service. (The company lost nearly one million such customers in the second quarter alone.) But residential land-line service accounts for just 18% of the company's revenues.
AT&T has more wireless customers (73 million) than any other U.S. carrier. That business, which generates one-third of revenues, is growing nicely. Second-quarter revenues were 16% higher than a year ago, thanks in part to burgeoning demand for wireless data -- much of it from users of Apple's iPhone. AT&T is also a leading provider of phone and data services to corporations (a slow-growing business) and broadband high-speed Internet service to consumers (a fast-growing one).
Overall, analysts see AT&T's earnings growing 7% this year and 9% in 2009. The stock sells for seven times estimated 2009 profits of $3.20 per share. Robert Wyckoff Jr., one of the managers of Tweedy, Browne Worldwide High Dividend Yield Value fund, estimates that AT&T's various businesses, if sold off separately, would be worth between $37 and $42 a share. In addition, the stock pays a $1.60 annual dividend, resulting in a remarkable 7.1% yield.
How safe is the dividend? Very. Although AT&T owes $80 billion, it is profitable enough to meet its debt payments easily. Beyond that, the company is expected to produce about $16 billion in free cash flow in 2008.
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