6 stocks to watch now, buy later

By Jim Jubak

No one ever roots for recessions. They're just too painful.

But they are useful -- very useful -- to investors. They separate the corporate wheat from the corporate chaff.

Economic downturns force people to postpone or cancel plans to go to college or buy a house. They force everybody to tighten their belts a notch or two. Some people -- 2.4 million in 2008 alone -- lose their jobs and often their health insurance.

Some companies make painful cuts by laying off workers, postponing capital investments and giving up on expansion plans. For others the damage is deeper: They struggle to survive canceled orders from longtime customers and a contraction in credit as banks suddenly stop lending. Some go out of business.

A reward for efficiency

Yes, recessions are painful, sometimes excruciatingly so. But they seem to be a necessary part of corporate capitalism. They correct the excesses of boom times when CEOs forget about risk and stop paying close attention to the bottom line. They reward efficient companies and punish the inefficient, giving every company incentives to join the efficient. They take market share away from the unimaginative and sloppy and give it to the aggressive and creative.

That's exactly what has started to happen in the current recession. Soundly run companies that saved their capital for a rainy day, took controlled risks, and developed and executed well-considered growth plans are now gaining at the expense of their competitors. You can't see that reflected -- yet -- in stock prices. We're still locked into a bear market that often punishes good "wheat" company stocks even more severely than shares of "chaff" companies. After all, at this stage of the bear market, only "wheat" company stocks still have any value. What do you sell if you need to raise cash -- Johnson & Johnson (JNJ, news, msgs) at $57 a share or Nortel Networks (NRTLQ, news, msgs) at 8 cents a share?

What to look for

But investors can see indications of which companies will come out of this recession stronger than they went in. The signs aren't visible -- yet -- in quarterly earnings reports; the economy is still too weak for that. The evidence that a company is "wheat" and will come out of this recession a winner is to be found around the edges:

• News of dividends increased.

• Reports of hiring.

• Capital spending maintained.

• Acquisitions made.

Do I need to tell you that these are the stocks you'd like to own when the economy is closer to a bottom and when the bear has started to loosen its grip? Until then -- maybe the last half of 2009 or the first half of 2010 -- I'm going to put these stocks on my watch list (at the end of this column). It's still time to learn and plan rather than buy. But the recession is starting to tell us very clearly what we'd like to own in the next bull market.

Let me give you a list of six "wheat" companies along with the signs that you can follow to separate the wheat from the chaff in the rest of the stock market:

Rising dividends. Most companies are cutting dividends. That's a signal that business has faltered to the extent that the company needs to conserve all available cash. A few, however, are moving in the opposite direction. On Jan. 14, the board of directors at Monsanto (MON, news, msgs) voted to increase the company's dividend by 10%. On Jan. 7, the company had reported earnings ahead of Wall Street forecasts and raised its forecast for all of 2009. The dividend increase is a good indication that the company is confident in that forecast.

Hiring instead of firing. Everybody's laying off workers -- even companies such as Microsoft (MSFT, news, msgs), the parent of MSN Money, that almost never reduce the size of their work forces. So in this environment, Teva Pharmaceuticals (TEVA, news, msgs) stands out because it is hiring. Just 100 workers for its Jerusalem production facility, but considering that the company has added 2,000 workers in the past two years and acquired Barr Pharmaceuticals, it's significant that the company is adding new bodies at all. (Acquisitions often result in layoffs as companies try to generate the synergies promised to investors to justify the deal.)

"We have no reason to fire employees. Employment stability is one of Teva's strategic values," said a company vice president. Guess Teva thinks the generic-drug business has a future, huh?

Continued: Keeping capital investment steady

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