As an investor or trader who suffered through a true crash like in 2008, it is very hard to be optimistic going into 2009. However, if you still have your capital and can look out twelve to sixteen months, America and some of its best American brands are truly on sale right now.
If you choose to invest, it will take a leap of faith, the courage to do what others can’t and the mental strength to ignore the daily volatility. For those who can, stocks are now approaching valuations as low as in 1991 and the 2002 bear market low. There are many negatives and positives to review before making calculated investment decisions about 2009. However, the main risk of the stock market in 2008 was that it had been ignoring bad news and was ready to tumble. I think that has already happened now and while we might not have seen the ultimate low in the market, we’re very near it. That has reversed the reward-to-risk ratio in the investor’s favor to the most positive it has been in years. The opportunities here lie in buying good companies at discounted prices to their private market value. It will likely be one of the best years for individual stock picking, versus owning the major market indexes since 2004.
The American and world economies were shaken to their core in 2008. Housing prices are now falling at an accelerating rate, just like they went up in the bubble. The financial system is littered with bad loans and derivative products that have spread the pain worldwide. Because things are so bad, financial institutions have been flat out lying and covering up their losses and hoping to remain solvent. The leveraged buyout craze (renamed "private equity" to make it sound more benign) drove up stock prices and saddled great American companies with debt. No initial public offerings of stock became possible and then the entire credit markets froze up.
The American consumer, who had been negative about the economy since the recession began one year ago, has finally shut their spigot of spending off. The consumer actually started saving and paying down debt. We finally learned that the biggest threat to the world economy was a credit bubble that was more systemic than most thought possible and is very painful to unwind.
Thus the economy and capital markets ground to a halt in September with unemployment soaring at rates we haven’t seen since 1981-1982. The Federal Reserve, which had no comprehension of the magnitude of the real estate and credit bubbles, is finally taking drastic action. Unfortunately, their recent actions long-term will probably lead to more excesses and inflation in the future. However we learned from the depression that bold unorthodox action must be taken to prevent the system from collapsing. Ironically, this is what will save capitalism from itself through this period of extreme turmoil.
The good thing; the market is now aware of all these negatives and stock prices reflect that. At the beginning of 2008, the market, investors and government were blissfully ignorant and in denial. Now with the market down 40% on average (and individual stocks I follow down 50 to 85%), investors' expectations versus what will likely occur in the future are finally low enough to enable a positive surprise over time and allow the market to rise.
As we enter 2009, let’s look at some things on the optimistic side of things for the equity markets. Most recessions last 12-16 months but let’s assume a much worse two year recession. That would mean this one will end sometime near the end of 2009. Markets usually sniff out a bottom in the economy six to nine months out and start to turn. That will probably occur in April or mid-summer 2009. Because the economic news continues to be worse on the employment and corporate earnings front, most investors don’t believe in this initial rally. Since we don’t know the timing of the turn in the market and since it is 40% down across the board, the time to begin entering the market has come as the risk has been reduced. You don’t have to commit most of your capital all at once but by March, I would be fully invested.
Falling oil and gas prices have relieved pressure on consumers and business up and down the supply chain. It is important to remember how much psychology and confidence plays in the economy and capital markets and why electing a new president offering assertive leadership was essential. A new president who will have to do something bold on the housing front. For instance, I think they will force rates down to 4% and offer to refinance anyone with a mortgage. That would be a significant stimulus and might bring some hope of price stability to housing. The fall in housing prices is inevitable but overcoming millions of underwater mortgages is impossible.
My criteria for selecting stocks are fairly simple. I want to own stocks that will give me either a short-term trading opportunity or in this environment a longer holding period because of the scope of the opportunities out there. I suggest and buy companies' stocks at valuations less than their potential private market value. I base it on the formula of enterprise value divided by debt (Market Cap +Debt). I then evaluate the company’s fundament business, assets, brands and quality of management. When the psychological and emotional factors begin to turn from extremely negative to slightly positive, the stock’s price will more rationally approach their fair value.
I want to own a mix of mainly lesser followed mid-cap stocks because they have more upside potential and quality large cap stocks that are significantly enough off their highs. I’m shooting for a 25% plus gain in 2009, versus the 12.5% I expect the major market indexes to return. My sector breakdown includes some new sectors for 2009 including health care and infrastructure providers. To be more realistic, my 2009 earnings estimates are 10% lower than the current analyst’s average consensus for 2009.
The following picks are off an average of 50% from their 52 week highs, trade at only 85% of revenue and have an average PE of 11.2. American brands are truly on sale right now and you should consider all of these stocks for 2009. So basically, with this basket of stocks you’re buying stocks that are on sale 50% off, their enterprise value is only 85% or less than one times revenue and have a PE multiple about one-third less than below the 15-16 PE of the S+P 500.
If you want a more concentrated portfolio, to prioritize, I have ranked seventeen of these thirty picks as strong buys with the remaining thirteen as simply buy.
Leader in healthcare paperwork automation.
2009 estimated PE: 21.3
Percentage off 52 week high: -35.7
New Administration will push for system wide automation to save and control costs.
Growth stock trades at reasonable 1.85 times revenue.
Leader in automation of prescriptions and doctors' offices.
2009 estimated PE: 13.7
Percentage off 52 week high: -48.3%
Smaller cap growth stock.
2009 estimated PE: 9
Percentage off 52 week high: -43.8%
Steady consistent profit revenue, very low valuation.
Trades at less than 10% of revenue.
Beaten down HMO focusing on Medicare.
2009 estimated PE: 6.7
Percentage off 52 week high - 57.7%
Valuation is so low because of threatened changes to Medicare Prescription D.
Trades at less than 10% of revenue and seven times earnings.
Thermo Fisher Scientific (TMO)
Leader in analytical and lab testing equipment.
2009 estimated PE: 9.9
Percentage off 52 week high: -45.7%
A steady earner at only 1.4 times revenue and less than ten times earnings.
Buying brands that have proven themselves over the long-term at discount to valuations in the last few years and historically.
Emerson Electric (EMR)
Engineering services in industrial, consumer and commercial markets.
2009 estimated PE: 13.2
Percentage off 52 week high: -41.42%
Worldwide known brand trades at 1.2 times revenue, 13.2 earnings and with a 3.9% dividend yield.
Illinois Tool Works (ITW)
Leader in welding equipment, fasteners and specialty packaging.
2009 estimated PE: 14.7
Percentage off 52 week high: -37%
Trades at 1.1 times revenue with a 3.7% dividend iield.
Snap On Tools (SNA)
Leading seller of automobile repair tools and diagnostics systems.
2009 estimated PE: 8.9
Percentage off 52 week high: -39.77%
This stock can usually only be bought in a recession.
Trading at less than 10 times earnings and only 81% of revenue.
Parker Hannifin (PH)
Another great American industrial brand that makes fluid power systems and electromechanical controls.
2009 estimated PE: 10.4
Percentage off 52 week high: -51%
Trades at only 70% of revenue with 2.6% yield.
Being contrarian and buying the hardest hit in the downturn, luxury brand names and specialty brands that are extremely out of favor.
JW Nordstrom (JWN)
Higher end retail known for impeccable service and quality.
2009 estimated PE: 10.8
Percentage off 52 week high: -67.2%
Higher end retailer that if bought during a recession you usually will do very well. Their reputation for incredible service generates loyalty among higher end shoppers.
When the economy recovers, the stock could easily double or more.
Trades at 60% of revenue, large historical discount.
Tiffany + Co. (TIF)
Another high end retailer with a well known brand name.
2009 estimated PE: 11.2
Percentage off 52 week high: -55%
Trades at 122% of revenue with a 3% dividend yield.
Pacific Sunwear (PSUN)
Actions sports and surf themed apparel.
2009 estimated PE: N/A
Percentage off 52 week high: -88.84%
This is a speculative pick that could easily triple or go to $0.00.
Trades at only 10% of revenue.
Recessions are great time to speculate in this one but limit position size to only 3-4% of portfolio.
Another active and sportswear apparel company with strong brand name recognition.
2009 estimated PE: 4
Percentage off 52 week high: -84%
Made a disastrous acquisition of ski equipment manufacturer Rossignal. They now have admitted their mistake, sold it and are focusing again on core apparel businesses.
Trades at only 52% of revenue.
Very speculative stock, so limit position size to only 3-4% of portfolio.
Regional casinos, such as those in the Midwest and Eastern United States, will do better than the currently suffering Las Vegas and Atlantic City Casino companies. The regionals are less leveraged and aren't burdened with large current new projects under construction. Their customers are usually local and lower end steadier casino players. Falling gasoline prices have helped because most patrons drive 20-40 miles to the casino.
The key here is these stocks are down almost as much as their Vegas oriented competitors even while their business has remained steady and will probably be first to turn around in an economic recovery. There is big potential for large capital gains by taking advantage of the extreme negative sentiment about the sector. This sector hasn’t traded at valuations this low since 1998.
Ameristar Casinos (ASCA)
Very Strong Buy
2009 estimated PE: 7.6
Percentage off 52 week high: -68.4%
This is my largest position going into 2009. They have seven casino properties and came in to 2008 finishing up their properties expansion and reinvestment. Being conservative with their balance sheet paid off as other companies now struggle with financing issues. The company gets 50% of profits from Missouri casinos where voters just repealed a loss limit rule and banned any future competition in the state. At less than eight times earnings and only 1.5 times revenue, this is a takeover target, my number #1 top pick for the year and could reach $18-22 in next two years.
Penn National Gaming (PENN)
2009 estimated PE: 16.5
Percentage off 52 week high: -64.2%
Penn is a larger regional gaming company with nineteen casinos in fifteen jurisdictions. This company has grown through a history of successful mergers and acquisitions. Last year they had a deal to sell the company at $60 to private equity buyers that fell apart, but they received $1 billion in break up fees. This has put them in a solid balance sheet position that may look to acquire another smaller regional company like Ameristar. At only 1.6 times revenue, this stock could be up 50% plus by the end of 2009.
Pinnacle Entertainment (PNK)
2009 estimated PE: N/A
Percentage off 52 week high: -67.7%
The company owns six casino properties with two in development and no Las Vegas exposure. It also owns land in Atlantic City for future development. More highly leveraged company so it is riskier, but with stock off 70%, it has good upside potential at only 1.2 times revenue.
Isle of Capri Casinos (ISLE)
2009 estimated PE: N/A
Percentage off 52 week high: -83.3%
The company owns sixteen casino properties but management in the past was weak. New management has made investments and invested in properties in hopes of turning the company profitable.
Trades at 1.34 of revenue.
Falling oil and natural gas prices should ease pressure on margins. I prefer $3-5 billion market caps that trade at only 45-50% of revenue, instead of the larger cap well known companies.
Eastman Chemical (EMN)
2009 estimated PE: 8.3
Percentage off 52 week high: -63%
Specialty chemicals, plastics and fibers.
Well diversified in different sectors of the economy.
Trades at only .46% of revenue and with a 6.2% dividend.
Huntsman Corp. (HUN)
2009 estimated PE: 35
Percentage off 52 week high: -86%
Failed merger in 2008 has the stock 86% off from its high. They did receive $1 billion in a break-up fee that will reduce heavy debt load.
Manufactures and marketing of differentiated chemical and inorganic products.
Trades at only .47% of revenue but 11.4% dividend is suspect.
This is a speculative mid-cap play.
Companies with brands that have done well over the long- term with stocks at 30-60% off former highs.
2009 estimated PE: 8.3
Percentage off 52 week high: -44%
Additives for motor oil and coatings for consumer products.
Great dominant brand for only 65% of revenue, eight times earnings with a 3.7% dividend yield.
2009 estimated PE: 17.1
Percentage off 52 week high: -29.3%
$460 million market cap trades at 1.5 times revenue with a 3.6% dividend yield.
The company manufactures well known brands such as Wd-40 lubricants, rust protection, rug and room deodorizers and Lava soap.
Scotts Miracle Grow (SMG)
2009 estimated PE: 13.4
Percentage off 52 week high: -29%
Dominant American brand in lawn and garden care.
Trades at only 100% of revenue .
The lawn and garden area is still growing even with weak housing.
The company just acquired its main rival in the business so pricing should be solid.
Auto Desk (ADSK)
2009 estimated PE: 12.6
Percentage off 52 week high: -63%
Dominant software for drafting and engineering.
Great management and stock is down 63%.
It takes years for a stock like this to set up right.
Trades at 1.4 times revenue.
Discover Financial Services (DFS)
2009 estimated PE: 15
Percentage off 52 week high: -52%
More conservative credit card company for better risk clients.
The company has brands like Discover, Diners Club and Pulse ATM network.
Trades at only 1.1 times revenue, with a 2.8% dividend.
I am buying quality companies with great market share positions and brands that will benefit from infrastructure spending. The key is that I would still buy these stocks even if there were no additional stimulus spending.
Thomas and Betts (TNB)
2009 estimated PE: 7.5
Percentage off 52 week high: -51.1%
TNB designs, manufactures and markets electrical components for industrial, commercial, communication and utility markets.
Dominant company trading at 70% of revenue that would benefit from any spending on the electrical grid and a rebound in normal business.
General Cable (BGC)
2009 estimated PE: 5.4
Percentage off 52 week high: -78%
Manufacturer of electrical, energy, industrial and specialty cables.
Trading at only 33% of revenue.
Quanta Services (PWR)
2009 estimated PE: 19
Percentage off 52 week high: -48%
Solutions for electric power, gas telecommunications and cable television.
Also makes smart utility meters.
Trades at one times revenue.
Cree Inc. (CREE)
2009 estimated PE: 38
Percentage off 52 week high: -58%
Maker of LED lighting which is more efficient and safer than compact fluorescent.
Trades at two times revenue.
Speculative play on energy efficiency.
Commercial Metals (CMC)
2009 estimated PE: 9.6
Percentage off 52 week high: -72
Steel and metal recycling.
Trades at only 25% of revenue with a 4.2% dividend.
Disclosure: Author holds long positions in CERN, MDRX, MCK, HUM, TMO, EMR, ITW, SNA, PH, JWN, TIF, DKS, PSUN, ZQK , ASCA, PENN, PNK, ISLE, EMN, HUN, LZ, WDFC, SMG, ADSK, DFS, TNB, BGC, PWR, CREE, CMC.