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20-Jun-01
D-E-F-E-N-S-E [BRIEFING.COM - Greg Jones, Robert Walberg] Getting nervous? You've got company. Warnings season has a way of testing one's nerves, and given the sheer volume and nasty tone of the warnings to date, investors are growing increasingly concerned that the tech sector could trigger another market meltdown.
While we put little stock in the dire forecasts of the gloom & doomers, there is mounting evidence that the economic slowdown will last longer and inflict more pain than many anticipate. Listed below are just some reasons why caution may still be the better part of valor:
Capital Spending Recession: Briefing.com has long argued that the current economic downturn was triggered by a protracted capital spending recession which follows a capex bubble in the late 1990s. All recent manufacturing data has supported this view, as have anecdotes heard from many corporations.
Layoffs: As the ripple effects of declining capital spending ripple through corporate America, firms respond by laying off workers. Jobless claims have continued their rise and payrolls are falling.
Income/Confidence Weaken: Layoffs of course lead to reduced income and confidence. Income growth is indeed slowing and while confidence saw a modest rebound in May, it remains sharply lower than levels seen late last year.
And Finally Consumption: Ultimately, consumer spending will determine whether the current downturn is mild or severe. Thus far, spending growth has slowed from its breakneck 1999/2000 pace, but is still quite respectable. The factors above, however, introduce a significant risk that further deterioration is in store.
For those of you that are questioning the timing and sustainability of an economic/earnings turnaround, and want to maintain a more defensive posture, Briefing.com suggests taking a closer look at the following stocks:
Homestake Mining (HM) 6.88: Two factors working in stock's favor. First, Fed reinflating economy. Second, techs raising fear factor which often leads investors to find shelter in gold stocks. Aside from these factors stock and group has exhibited impressive relative strength so far this year.
Merck (MRK) 74.60: Drug sector routinely outperforms during difficult market conditions, and with MRK trading near the low-end of its 5-yr p/e range, now not a bad time to consider going long this industry leader.
Coca-Cola (KO) 43.75: Like Merck, Coke is a leading global brand that is trading near multi-year lows in valuations terms. While growth in its core business has slowed a bit, explaining the recent depressed stock price, at current prices Briefing.com contends that most of the negatives are priced in. With nearly half the analysts covering the stock rating it NEUTRAL/HOLD, plenty of room for upgrades once conditions improve.
McDonalds (MCD) 28.20: Sticking with our global brands at a discount theme, MCD trading near lower-end of its 5-yr valuation range amid Mad Cow concerns. Having just warned for Q2 company also has bad news behind it. Company's aggressive steps to revitalize product offerings should also help drive future growth.
Ford (F) 24.74: Admittedly, auto stocks not first thing you think of when asked to identify defensive groups/stocks. However, in Ford's case Briefing.com contends that the legal risks have so depressed the stock that it is now a attractive turnaround candidate with limited downside risk. Relatively low inventories and a dividend yield pushing 5% also make pique our interest.
Excelon Corp. (EXC) 67.13: No need to stretch the defensive definition on this one, as EXC is one of the largest U.S. electric utilities. Ongoing power shortage in CA, solid earnings record, and company's exposure to nuclear power make EXC a candidate to outperform during the next several months. Also helps that company recently reaffirmed earnings guidance.
These are examples of defensive-type companies that should offer shelter from the potential of another tech storm. Briefing.com will be identifying more such companies in the days and weeks to come on our Story Stocks page.
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