Markets

6 Stocks Poised for Big Gains

We focus on industry leaders with strong finances.

By David Landis, Contributing Editor

From Kiplinger's Personal Finance magazine, July 2009

We feel more relief than euphoria over the 37% rise in U.S. stock prices between mid March and mid May. Even if signs of an economic recovery are on the horizon, it hardly seems the time to take big risks in the stock market. There will be time for that later. Meanwhile, we remain partial to companies that dominate their markets, possess fortress-like balance sheets and boast loyal customers who keep coming back for more. And if a company offers a dividend to tide you over until its growth rate resumes its old trajectory, all the better.

When the recovery arrives, we have no doubt some investors will wish they could have picked up the six companies highlighted here when they were cheap. Although the stocks have climbed along with the rest of the market, you can still get them at attractive prices.

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Some companies don't see a recession as an excuse to stand still. Graco (symbol GGG), which makes devices that pump, mix, measure and spray all kinds of fluids, is one of them. Even as Graco's customers in the auto and construction industries were cutting back last year, the Minneapolis firm was hiring engineers and boosting new-product spending by 20%. This year it will introduce 41 new products, which will boost the company's future earning power. The dividend, which has tripled since 2003, provides a 3.0% yield. Graco is also a player in wind power, producing devices that apply foams, lubricants and resins to a variety of wind-turbine components.

Precision Castparts (PCP) makes metal components for aircraft engines, power-plant turbines and other products for which strength and structural integrity are critical. It is a high-performance arena in which few manufacturers can play, and the Portland, Ore., firm boasts decades-long relationships with key customers. Unfortunately, many of them are in the depressed aerospace industry (54% of sales). That business will eventually recover. And as engines grow more complex, demand will grow for Precision's parts. Meanwhile, the picture is brighter in the power-generation business, which is buoyed by growing global demand for electricity.

A voracious conglomerate that acquired more than 350 companies in the 1960s and '70s, ITT (ITT) today focuses on two promising areas: electronics for the U.S. military (it's the Army's biggest supplier of night-vision goggles), and pumps and equipment for water- and wastewater-treatment systems. Defense electronics, which accounts for more than half of revenues and operating profits, is growing even during the recession. The water-infrastructure business is well positioned for future growth in global demand for clean water. ITT, based in White Plains, N.Y., has a solid balance sheet and produces plenty of cash. The stock yields 2.0%.

In a downturn, corporations tend to cut tech spending. But CA (CA) gets more than half its business from contracts booked in previous years for software licenses and ongoing maintenance serv­ices. Because its clients tend to stay put, the Islandia, N.Y., software maker has a fairly low-risk business model. And thanks to cost-cutting, its operating profit margin has been steadily growing in a tough environment. On the downside, more than half of its revenues come from software for mainframe computers, a slow-growing market. But there is a lot of potential in the field of network security and the business of improving the efficiency of a company's computer operations.

Emerson Electric (EMR) makes a wide variety of meters, motors, sensors, valves, power systems and appliances that it sells to industrial customers and consumers. The 119-year-old St. Louis firm is anything but glamorous. But investors seeking a predictable business with growing dividends (Emerson's payout has increased 52 straight years) need look no further. Emerson's business segments that rely on consumers and residential construction are suffering, and the company expects profits to fall 16% to 23% for the fiscal year ending in September. Nevertheless, Emerson will still produce more than $2.5 billion in free cash flow this year.

Rising joblessness seems to have frightened some investors away from Automatic Data Processing (ADP), which provides payroll and record-keeping services for more than 585,000 employers. ADP, one of only four industrial firms with a triple-A credit rating, has a dream business model. In addition to collecting fees from clients, the Roseland, N.J., firm gets 7% of its income from interest on the taxes it deducts from paychecks and later turns over to the government. That figure will go up when interest rates rise. And despite the lousy economy, ADP expects profit gains of 10% to 12% for the fiscal year that ended in June. The shares yield 3.6%.

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