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How are some stocks still earning their keep?

In a market that keeps on making investors nervous, look for predictable earnings, says this analyst, who has five recommendations.

Is there anything to hang on to, investors might be forgiven for asking as they survey the latest wreckage in stock market.

Well, yes, there are a few life buoys out there that are actually pointing the way to calmer waters. Profitable waters, even.

The one you might want to hitch your portfolio to, one expert tells us, is labelled “predictable earnings.” Stocks with this attribute have been doing much better than you might expect.

Historically, stocks that greet the market with a “positive earnings surprise” do exceptionally well, Ms. Jennifer Dowty writes in Investor's Digest of Canada. But what you want now is a lack of surprises.

You want to know that a company’s earnings will hold their ground next quarter and the quarter after that and the quarter after that, etc., etc., etc.

“Earnings predictability is one of the seven key criteria on Warren Buffett’s ‘Inner Scorecard’ for investing in stocks,” says Ms. Dowty, who looks after portfolios at MFC Global Investment Management.

“Investors are nervous: they have been sitting on cash, buying gold stocks or buying defensive stocks with high earnings predictability.”

Without further ado, she goes on to survey the prospects of five of the predictable companies she has been following.

A place to park your money

“Defense” and “predictability” suggest the necessities of life. Food, shelter, medicine and utilities. On cue, the first two stocks on this analyst’s list are in the supermarket business.

Look at the price chart for Metro Inc. (TSX-MRU.A) and you wouldn’t know we’re in the midst of a bear market (except for a small downdraft during the general carnage of the past few days). Metro has 227 stores across Quebec and Ontario, including the ex-Dominion stores that now bear its name.

“This is a defensive, liquid growth stock that pays a 1.5 per cent dividend to investors,” says Ms. Dowty. It has a strong balance sheet and a share buyback program that cushions risk.

The stock’s valuation suggests that its upside may be limited to the high $30 range. And that’s where it stands, opening at $37.40 today. But its very stability can make it a sort of streamlined GIC.

Metro, the analyst says, “may represent a good alternative to cash, as a place to park your money until market visibility improves.”

George Weston Ltd. (TSX-WN) owns a big chunk of Loblaw, which is still pulling itself out of the doldrums. But it has other interests, and is sitting on comforting pile of cash obtained through the sale of Nielsen’s Dairy and its U.S. baking interests. It is the most expensive of the five stocks, at $60.

Making room in the budget

Health and nutrition are right up there with food on the predictability scale. Atrium Innovations (TSX-ATB) markets more than 1,300 vitamins, minerals and specialized products to health care professionals.

Its long-term prospects are good, as the market grows along with an aging population. Like food, health and nutrition are things you make room for even in a shrinking budget.

The annual growth rate for the industry is around 10 per cent and it’s double that for Atrium Innovations. The company has grown internally, but it has also picked up a number of acquisitions. With a strong balance sheet, it can go on doing so.

Late last fall, the company reported better-than-expected earnings and began a run up the charts. The stock started nudging “overbought levels,” Ms. Dowty says. Writing before the market meltdown late last week, she foresaw Atrium’s shares slipping down into the $14 range. “I would buy the stock on weakness,” she added. It opened today at precisely $14.

On the utility front, the analyst likes Boralex Power Income Fund (TSX-BPT.UN), a Quebec firm dedicated to renewable energy through hydroelectricity, wood residue and natural gas-fired plants.

This fund ‘s units were on a downward curve until early this year, when they started back up. They’re still moving up and opened today at $4.

There is one more stock in the “predictable earnings” fleet — and it is not a traditional defensive stock.

Fertilizers and tobacco

Fertilizer is certainly a necessity of life, but not for every household. And despite the need to keep on producing food, fertilizer stocks run in cycles like minerals and other natural resources.

So Migao Corp. (TSX-MGO) is scarcely risk-free. But Ms. Dowty has had several good runs with this stock. Most recently, it ran from $2.96 at the beginning of December to over $6 in a matter of weeks.

The company does have something of a captive market. It produces potash-based fertilizers in China, which uses more fertilizer than any country in the world.

Over 50 per cent of its sales are to the tobacco industry (and China hasn’t bought into the anti-smoking movement in a big way yet).

Earnings are expected to double in 2009 and Migao itself estimates that its revenue will rise by 84 per cent year over year. It is increasing its production capacity.

After its “phenomenal” short-term performance, the analyst expects the stock to pull back. She suggests to her readers in Investor's Digest of Canada that they buy at around $5. In fact, it’s still sitting at a little over $6.

It seems no one can predict the stock market’s zig zags from one hour to the next. But if you can reasonably predict that a company is in store for a steady stream of earnings, says this analyst, climb on board.