A doozy of a recession may be behind us, but that doesn't mean stocks are out of the woods.
Creeping inflation, high unemployment, sluggish consumer demand and still-unsettled credit markets are only a few of the concerns that remain. Just in case this recovery hits a bump or two, it's smart to own stocks with good shock absorbers: strong balance sheets, good cash flow and dominant positions in their markets. Generous dividends don't hurt either.
The following eight stocks should catch a brisk tail wind from a rising market. And even if tail winds turn to head winds, we think all eight will keep moving forward.
1. UPS
It's easy to see why the fortunes of UPS (UPS, news, msgs), the world's largest package-delivery company, are closely tied to the health of the economy. Profit for 2009 is expected to come in 38% lower than for the previous year as businesses and consumers have bought and shipped fewer things.Don't make the mistake of waiting until the clouds clear to buy this Atlanta giant. UPS has a long track record of producing high returns for shareholders. It might take a while for consumer spending to ramp up, but once it does, UPS should see big gains, and it will benefit from the departure of rival DHL from the U.S. shipping market in 2009. Analysts expect earnings to improve by 23% in 2010, to $2.68 a share, helped in part by cost cutting and lower capital spending. The stock yields 3.3%.
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2. Kimberly-Clark
Kimberly-Clark (KMB, news, msgs) is the kind of company investors love in a recession. Consumers buy its Huggies diapers, Kleenex tissues and other paper and personal-care brands in any economic environment. But Kimberly-Clark should also perform better in a recovery, because customers who traded down to no-name substitutes are likely to return to brand-name products.The company should also see better profit margins as a result of recent cost-cutting programs. Analysts expect profit to climb 13% in 2010, to $5.19 a share. The Dallas company's long-term prospects also look bright, with good growth expected to come from its health care division and from an expansion of sales in emerging nations.
The stock trades at 12 times expected 2010 earnings -- reasonable for a low-risk investment with good growth prospects -- and yields 3.8%.
3. PepsiCo
We like PepsiCo (PEP, news, msgs) for much the same reason we like Kimberly-Clark: It has a large stable of powerhouse global brands that can provide years of solid growth. The Purchase, N.Y., seller of beverages and snack foods is known for its innovation in developing and marketing successful new products, making it a good way to invest in the expected growth in the purchasing power of consumers in developing countries.Pepsi's size, financial strength -- it generates about $7 billion in operating cash flow annually -- and 2.9% dividend yield also make it a relatively safe growth stock. The stock's price-earnings ratio of 15, based on expected 2010 earnings of $4.18 per share, looks compelling, especially given management's expectations of 11% to 13% profit growth in the coming year.
4. Paychex
Although the economic news is improving on many fronts, the unemployment rate continues to rise. No wonder shares of Paychex (PAYX, news, msgs), which processes payrolls for more than 550,000 U.S. clients, are available at bargain levels. They trade for 21 times the past year's earnings, compared with a five-year average of 29. It's hard to know when unemployment will bottom out, but it's easy to figure out that now is the time to buy shares -- while they are cheap.Paychex is one of two companies that dominate payroll processing; Automatic Data Processing (ADP, news, msgs) is the other.
Paychex is a great business, in part because the Rochester, N.Y., company earns interest on the payroll funds it holds temporarily for clients. Lately, low interest rates have crimped this part of the business. But you don't have to wait until the jobs picture improves to profit from this stock. It yields 4.1%, and thanks to Paychex's debt-free balance sheet and solid cash flow, the $1.24-a-share annual dividend appears safe.
Continued: Western Union, Sysco and more
