Six growth stocks for a flat 2010 economy
Chances are the outlook of many economists for 2010 may be a bit too optimistic, says this U.S. advisory, but it has six growth stocks to buy.
It’s Christmas Eve, so we’d like to be reasonably cheerful.
Nonetheless, we’re going to tell a joke about economists. It does not end happily.
Three economists come across tracks in the woods. The first says: “Deer tracks!” The second says: “Bear tracks.”
The third gets hit by a train.
This joke is the preface to a preview of the U.S. economy (a Canadian preview comes next week, just in time for New Year’s).
That preview comes to us from one of the U.S. advisories we consult most often, Dow Theory Forecasts. The inheritors of the original Wall Street theorist, Mr. Charles Dow, the editors of this publication have been measuring the markets and the economy scrupulously for many years.
We’ll see what they have to say about 2010, and we’ll also see which six growth stocks — “capital gains favourites” — they like for next year.
Three different answers
In defence of economists, we know more than a few who are perfectly capable of distinguishing animal tracks from railroad ties. Nonetheless, the joke above contains two truths, according to this advisory.
“Ask three economists for an opinion and you’ll probably get at least three different answers.”
“Many economists probably felt like they got hit by a train in 2009.”
In October 2008, economists were predicting positive GDP growth for 2009, according to Blue Chip Economic Indicators (the “bible” of macroeconomic forecasts). No such luck. It now appears that GDP will be minus 2.5 per cent.
But that never stops economists from predicting again. It’s their job.
This year, they’re calling for growth of 2.7 per cent. The advisory adds its grain of salt.
“Actually, what’s important is not so much whether economists will be right this time around. (The odds are they won’t be.) Rather what’s important is what direction reality diverges from this prediction.”
Three ways to be better
There are actually three ways in which the economy could be even better than economists are predicting, says Dow Theory Forecasts.
Despite the Federal Reserve Board’s endless warnings about inflation, says the advisory, it is really more concerned with the fragile economy. Thus interest rates should stay low. “That’s a plus for economic growth if — and it’s a big if — businesses want to borrow and creditors want to lend.”
Second, the economy has been propped up with massive stimulus spending. Many people rail against this expenditure of big bucks, but it would be misguided to assume this will not have a positive effect on the economy in the near term, the advisory believes.
Finally, the stock market anticipates trends. The 65 per cent advance in the S&P 500 Index since its March lows might be the biggest argument in favour of accelerated economic growth in 2010.
On the other hand ... (Harry Truman once asked for a one-handed economist, saying he was tired of hearing economists give an opinion and invariably follow it with “On the other hand ...”)
The people buying the products
There are also compelling reasons why the economy may not match the predictions made for it in 2010.
Unemployment is still hovering around 10 per cent and it may rise a bit more in the first quarter of 2010. Where does that put the consumer, who accounts for so much of America’s GDP?
In limbo, according to Blue Chip Economic Indicators, which expects a mere 1.9 per cent increase in personal purchases next year.
The consumer remains the key to the economy and potentially, to the stock market, says the advisory. In spite of a weak economy, corporate America was able to post better earnings than expected. But a lot of that came from cost cutting and productivity gains.
More earnings growth must come from rising revenues and those must come from the people buying the products. “Thus, while the stock market didn’t seem to care that economists were off the mark in 2009, this year could be different,” concludes the economy. Be cautious.
Six growth candidates
Still, there will surely be stocks that go up. This advisory has six candidates. Five of the six rate both a Focus Buy (best buy for the next 12 months) and Long-Term Buy (Best Buy for the next 24 months).
Aflac (NYSE-AFL), the insurance company that has peppered the airways with its signature duck, has had to duck some bad securities. But it has new opportunities in Japan that should produce rapid growth. It trades at $46.60 and yields 2.4 per cent on a dividend of $1.12.
BMC Software (NYSE-BMC) develops products that run corporate data centres, which in turn house vital computer systems. That gives it plenty of locked-in long-term contracts. It has also made several key acquisitions. It trades at $36.92 but pays no dividend.
DirecTV (NYSE-DTV) is the biggest satellite TV operator in the U.S. It has many exclusive contracts (i.e., the NFL) and targets wealthier, less risky customers. Many expect one of DirecTV’s telecom partners to bid for it. In the meantime, the shares sit at $33.65. There’s no dividend.
Hewitt Associates (NYSE-HEW) expects its biggest growth to come form the consulting business it delivers on employee benefits plans, etc. Its health-care services should do well under the new legislation coming out of the Senate. Trading at $42.90, with no dividend, it is a Focus List Buy.
Hospira (NYSE-HSP) should also benefit from new health-care legislation. It makes medical devices, injectable pharmaceuticals and biosimilar generic drugs. It is the only U.S. firm making these drugs. This firm trades at $50.14 and pays no dividend.
Last but hardly least is a stock that needs no introduction, IBM (NYSE-IBM). “Big Blue” forges ahead with new projects, like cloud computing, in which computing services are delivered by Internet from remote data centres. It trades at $129.95 and yields 1.7 per cent on its $2.20 dividend.
This advisory warns investors not to expect too much from the economy or the markets in 2010. But we can expect to put all those thoughts aside for a few peaceful days. Have a wonderful holiday. We’re back on Tuesday.
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