Jubak's Journal
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5 stocks for a possible market bottom
Companies like FPL and Occidental Petroleum have dependable growth and a kicker -- insurance against declines.
By Jim Jubak
My timing last week couldn't have been much worse. On CNBC's "Morning Call" and in Jubak's Journal I recommended a basket of railroad stocks just in time to catch an analyst downgrade and the rout in the sector the next day. Mind you, I still believe that you'll make a solid profit in these stocks, even from the price of my April 13 recommendation. But nobody wants to start off owning anything in a hole. As much as I like Norfolk Southern (NSC, news, msgs), for example, I'm not glad that I took an almost immediate hit of more than 8% even if the stock has bounced back almost 6% from its low last week.
I bring this up not just as a tip of the hat to honesty in stock picking -- report the bad as well as the good -- but because what happened to railroad stocks last week is representative of a bigger problem in the stock market.
Since Monday's close the Dow Jones Industrial Average is down 8% from its 2005 high and the Nasdaq is down 11%. I think it's accurate to call this a correction. If the correction is over, this would be a great time to pick up stocks likely to lead the market in the next six months. But if the correction isn't over, then buying now is setting yourself up for the kind of disappointment that my railroad picks delivered -- you may do fine in the end but you'll start off in the hole.
No clear signals
Unfortunately, the tea leaves that technical analysts use to get an indication of the stock market's direction aren't providing clear signals one way or another now. Yes, it's a good sign that the market's fall stopped after the panicky selling Friday afternoon. But the rally on Monday and Tuesday hasn't been convincing. Monday the Dow was hobbled by a wipeout of Dow component 3M (MMM, news, msgs). And Tuesday's action stalled at resistance at near 1,930 on the Nasdaq. So the market is starting to behave like it's sold out, and the kind of bounce that often signals the end of a market decline is usually bigger than this.
I don't like to miss a buying opportunity. And I don't like to buy when stocks are falling. Most of all, I hate buying a stock that'll take a big fall before turning up.
So this week I've gone looking for stocks with the kind of solid, dependable growth that should make them outperformers this year but that have an added bit of insurance that'll keep them from dipping too far if this correction still as a few more weeks to run. The insurance could be a dividend, low price-to-earnings ratio or special situation. (For more on my take on why this correction could run for another couple of weeks, see my column Tuesday column "7 reasons the bears might be right."
In my regular 11:20 a.m. ET Wednesday appearance on "Morning Call" I picked these three stocks for investors looking to buy at a market bottom.
Two for one
FPL (FPL, news, msgs) is two companies in one, which is how investors can get safety and growth in a single stock.
First, there's the slow-growth, regulated utility business that supplies electricity to more than 4.1 million people in southern Florida. The stability of this business lets FPL pay a dividend of 3.5%, which puts a solid floor under the stock. Second, there's the unregulated energy business that owns 10,800 megawatts of wind, fossil and nuclear power plants, mostly in the Midwest and on the Pacific Coast. That subsidiary, FPL Energy, produces more power from wind than any other utility in the country, about 25% of all the power FPL produces. The company plans to add 250 to 750 megawatts of wind power generating capacity by the end of 2005, double or quadruple the company's current wind capacity. In 2005 the regulated utility business will provide about 75% of operating earnings, but most of FPL's growth will come from the unregulated power business, which is likely to grow about five times faster than its regulated counterpart.
Our StockScouter rated the stock a 6 out of a possible 10 on April 20.
Back into Libya
Occidental Petroleum (OXY, news, msgs) was the big winner when Libya re-entered the global oil market. Occidental, which had produced oil in the country for decades before sanctions were imposed, won the right to explore and produce oil on five of the 15 blocks let out for bid. Libya has proven resources of 40 billion barrels of oil, which puts it eighth in the list of global oil producers after Russia. So it's extremely likely that Occidental's exploration will pay off. Even better, Libya produces light, low-sulfur oil, a precious commodity now because just about all the extra production promised by Saudi Arabia will be harder-to-refine heavy oil.
This year Occidental should be able to increase production by about 3% over 2004, and that's before the company sees any oil from Libya. After reducing debt by $665 million in 2004, the company will see a $65 million reduction in interest expenses this year. Analysts call for the company to earn $6.96 a share in 2005. That'll turn out to be low by almost $1 a share. Add that surprise to the growing value of the future production coming from Libya and you have a recipe for a safely appreciating stock. The shares also carry a 1.8% dividend yield. Our StockScouter rated the stock a 9 on April 20.
Picking up new customers
Dollar General (DG, news, msgs) is doing a Wal-Mart (WMT, news, msgs) to Wal-Mart. While growth has stagnated at the king of price-cutters, Dollar General has actually been beating Wall Street estimates on sales growth. You know those March sales numbers that started this market slide as investors began to worry that the economy was slowing too much? Well, Wal-Mart's same-store sales growth hit analysts' estimates right on the head at 4.3%. But that was a disappointment to investors given the company's track record and the 6% growth recorded in March 2004. Dollar General was one of the few retailers to beat estimates; it posted a 4.2% gain while analysts were looking for 4%. It also delivered better growth than in a year earlier, when same-store sales growth rose 3.2%.
What seems to be happening is that Dollar General is holding on to its traditional low-income customer, while picking up customers with household incomes of $50,000 or more. According to the company, that's its fastest growing market segment, and the number of shoppers in that demographic is up 27% from 2001 to 2004.
But let's not get carried away. Dollar General isn't Wal-Mart. It doesn't have the merchandising systems in place and it doesn't have the clout to wring the lowest prices from suppliers. So the company specializes in over-runs and doesn't always have everything in stock. But with a net profit margin of 4.5%, substantially ahead of Wal-Mart's 3.6%, Dollar General isn't doing too badly. Our StockScouter rated the stock a 6 on April 20.
And as always, I have two exclusive picks for CNBC.com on MSN readers.
Exclusive picks
Burlington Northern Santa Fe (BNI, news, msgs). Nothing has changed about this railroad stock since I recommended it April 13, except that it's 6% cheaper than it was a week ago. If I liked it then, why wouldn't I like it even more now?
Here's what I wrote then: "Burlington Northern Santa Fe puts it all together in one railroad package for investors. The company is a strong operator that's gaining market share by adding new customers, especially among coal-burning utilities. Revenue grew by 16% in 2004. At the same time, the company still has room to improve margins, thanks to higher volumes and cost cutting. The railroad looks to be in a strong-enough competitive position to see price increases of about 3% this year and for its fuel surcharge to stick. Wall Street expects earnings per share to leap by almost 23% this year, which explains the 12-month trailing P/E ratio of 25.1. The P/E ratio based on projected 2005 earnings per share is just 15. Wall Street projects average annual earnings growth of almost 11% for the next five years."
Our StockScouter rated the stock a 6 on April 20.
Corn Products International (CPO, news, msgs). I hate to keep pushing Corn Products, well, not really. The company's stumble this quarter when management thought the price of corn, the company's primary raw material, would zig when it zagged, has made the stock a bargain. It knocked about 25% off the price.
But now that the company has announced first quarter results, without more bad news, and reiterated that this was a one-quarter mistake and not something systemically wrong with the company, it's time to jump in with both feet. The stock is a great weak-dollar play; the company buys corn in dollars, increasingly sells its sweeteners internationally and then finally exchanges those revenues back into dollars. And did I mention that the stock's fall took a good deal of risk out of it? Our StockScouter rated the stock a 4 on April 20.
Editor's Note: A new Jubak's Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Corn Products. He does not own short positions in any stock mentioned in this column.
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