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The ephemeral optimism that emerged in December has been undercut by a return of pessimism about problems confronting the economy. Much of the gains from earlier this year have evaporated, and stocks this week approached their Nov. 20 lows.
Still, 2009 should not be a lost year for patient, long-term investors who snap up great companies likely to emerge from the troubles with less flab and enhanced competitive advantages.
MSN CAPS can help you identify such winners. During the 20 months for which we have data, CAPS' top-rated four- and five-star companies have outperformed the market, with average annualized gains of 7% and 12%, respectively.
Once you've found a strong pool of candidates, look for undervalued stocks. Happily, this task is easier amid the market's current malaise.
To discover these stocks, you could enlist the CAPS stock-screener tool. With your list of screened stocks, it takes a single click to get context on what’s behind the recent momentum at individual companies -- each CAPS page includes basic details about the company as well as the stock's performance.
A recent search uncovered a promising list of companies rated four or five stars on CAPS and with the financial strength to survive the downturn and emerge stronger two or three years down the road:
| Company | Sector | 2009 change | Forward price-to-earnings ratio | Earnings per share | Return on equity |
|---|---|---|---|---|---|
Cigarettes, smokeless tobacco | 12.7% | 9.8 | $3.05 | 30.2% | |
Cigarettes | -4.8% | 12.5 | $3.33 | 40.6% | |
Biotechnology | -3.4% | 19.7 | $1.91 | 51.6% | |
Consumer staples | -7.5% | 14.8 | $3.49 | 90.0% | |
Copper and gold | -3.8% | 81.5 | $7.26 | 20.1% | |
Pharmaceuticals | -14.3% | 8.5 | $1.87 | 20.9% | |
Soft drinks and snacks | -7.5% | 13.0 | $3.50 | 35.0% |
While PepsiCo (PEP, news, msgs) has seen its soft-drink sales erode, I firmly believe that its strong management team will continue to guide the company to profitability. Both Pepsi and competitor Coca-Cola (KO, news, msgs) have moved heavily into noncola and noncarbonated beverages. But, unlike Coke, Pepsi also sells salty snacks, giving the Purchase, N.Y., company a wider product base from which to generate revenue.
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Endo Pharmaceuticals (ENDP, news, msgs) develops and markets both branded and generic prescription medicines. Branded products include Lidoderm, Percocet, Percodan and Zydone. It also makes generic oxycodone, as well as cough and congestion remedies.
Makers of generic drugs could shine under the Obama administration. In pledging to help drive down health care costs, President Barack Obama has touted measures that would foster development of generic biologics and accelerate Food and Drug Administration approval of generics.
Gilead Sciences (GILD, news, msgs) is an example of a financially strong company with promising drugs in the pipeline that target potentially large markets. What's more, the recession should have little impact on its business.
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The Foster City, Calif., company produces four HIV drugs that are in the forefront of worldwide efforts to treat some of the estimated 33 million people living with acquired immune deficiency syndrome, a collection of symptoms and infections that result from damage to the immune system caused by the human immunodeficiency virus.
Both Altria Group (MO, news, msgs) and Philip Morris International (PM, news, msgs) sell cigarettes. Investors may have ethical concerns about owning these stocks, but a recession probably won't keep smokers from lighting up -- indeed, hard times could prompt them to smoke even more.
And for all the anti-smoking efforts of our state and federal governments, they also rely heavily on tax revenue from cigarettes. As a result, both Altria and Phillip Morris should reap profits in the lean times ahead.
Altria is also positioning itself well for the long term, having recently acquired smokeless tobacco maker UST (UST, news, msgs). As smoking bans proliferate and cigarette consumption continues its steady decline in the United States, smokeless tobacco represents a growth area for Altria.
While CAPS ratings are a great way to kick off your stock search, they should not be your only resource. Before buying a stock, an investor should read the company's 10-K report and remain mindful of the stock's valuation and the company's fundamentals and growth prospects.
In this environment, look for sustainable earnings and examine the company's debt position and cash flow. And let the collective wisdom of the 125,000-member CAPS investment community help you make better investing decisions.
This article was reported and written by Jennifer Schonberger for The Motley Fool. At the time of publication, she owned none of the stocks mentioned.
