Markets
8 Stocks to Ring In the New Year
Stocks are cheap. But with the economy in recession, we concentrate on household names that will hold up no matter how bad things get.
By David Landis, Contributing Editor
From Kiplinger's Personal Finance magazine, January 2009
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General Dynamics (symbol GD)
Because it gets about two-thirds of its revenues from Uncle Sam, General Dynamics should hold up well in a recession. The world's sixth-largest defense contractor makes everything from tanks and submarines to electronics for intelligence services. For its July–September quarter, GD's backlog of business was $60.5 billion, up from $55 billion the previous quarter. Better yet, profit margins rose in each of GD's four business segments.
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GD also owns Gulfstream, a maker of high-end business jets, which accounts for about 18% of its revenues. This business could dip in the short term as corporate budgets tighten, but demand remains strong from oil-rich Persian Gulf states. The stock trades at just nine times expected 2009 profits of $6.71 per share and yields 2.3% (all prices and related data are as of the close on November 7).
Johnson & Johnson (JNJ)
Johnson & Johnson is the right pick for the times. No matter how bad things get, people will still buy household essentials, such as Band-Aids and Rolaids. The shares, at 13 times estimated 2009 earnings of $4.68 per share, are cheaper than they might otherwise be because of concerns about J&J's larger divisions: pharmaceuticals (40% of revenues) and medical devices (33%). Several drugs are about to lose patent protection. J&J also faces fierce competition in the market for drug-coated stents, which are used to prop open diseased arteries.
The firm's pipeline of new products is robust and contains several potential blockbusters. Meanwhile, J&J is using its financial might to reward shareholders. It is buying back $10 billion worth of stock and paying a $1.84 annual dividend. The stock yields 3.1%.
Automatic Date Processing (ADP)
Even though jobs are disappearing, the business of processing corporate payrolls remains a good one. ADP boasts long-term contracts and high repeat business, and it gets to keep the interest it earns on billions of dollars in taxes deducted from paychecks that are later turned over to the government. This profitable business model generates a lot of cash.
Analysts are forecasting below-average growth for ADP in 2009 as companies cut back on hiring. Lower interest rates also mean less float on the money ADP holds for clients. But these short-term issues mean investors can buy into a top-flight business at a price just above its five-year low. The stock trades for 15 times expected earnings of $2.39 a share for the year that ends this June. The $1.16 annual dividend translates into a 3.3% yield.
American Tower (AMT)
Fierce competition means that wireless-phone carriers will continue building their networks in any economic environment. That's good news for American Tower, which owns or operates more than 23,000 wireless-phone and broadcast-communications towers. Major carriers, such as AT&T and Verizon, are willing to sign long-term contracts with built-in annual price increases to lease space on these towers so that they can provide voice and data services for their customers. Morningstar analyst Imari Love estimates that American Tower has more than six years' worth of revenues already locked in to these noncancellable contracts.
The shares are not cheap by most measures. Still, American Tower's locked-in revenues, financial strength and expansion opportunities in Mexico, Brazil and India make this stock appealing.
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