How smart investors read the headlines
Headlines can knock investors off course, says a U.S. advisory that looks at the big picture and recommends four global growth stocks.
First the good news. Then the bad news.
Since the first faint signs of economic recovery late last year, it has happened like clockwork.
A promising piece of news is followed by a frightening report that seems to put the whole recovery in jeopardy.
This is called a “growth scare,” says one leading U.S. advisory, and it should only scare those who lose sight of the big picture.
“The more the market rallies and prices in a U.S. and global economic recovery, the more sensitive stocks are to economic news,” says Mr. Elliott H. Gue, editor of Personal Finance.
Thus far, he points out, the market rally has unfolded with only minor pullbacks. A more meaningful correction may well happen sometime in the first half of 2010.
But wise investors will not let themselves be pushed and pulled by today’s headlines, or tomorrow’s.
They will be ready to buy when the market corrects. Mr. Gue sorts through the possibilities, and recommends four global growth stocks that should allow investors to embrace growth, not be scared of it.
Two Canadian buys
Before we proceed, we will tell you that this advisory’s Growth Portfolio contains three Canadian stocks. They are not highlighted in this article, but that won’t stop us from shining a light on them.
Two are resource stocks. The advisory makes uranium giant Cameco Corp. (TSX-CCO; NYSE-CCJ) a buy up to US$35. It trades at $27 in New York and at $28.09 on the TSX, yielding 1 per cent on its $0.28 dividend.
Senior gold producer Goldcorp (TSX-G; NYSE-GG) is a buy up to US$45. The shares are $36 in New York, and a much higher $41.04 in Toronto. It yields 0.5 per cent on the dividend of $0.19.
Conglomerate Brookfield Asset Management (TSX/NYSE-BAM) is a hold. It trades at $24.93, yielding 2.2 per cent on the $0.54 dividend.
Lumpy recovery
No two economic recoveries are exactly alike, says Mr. Gue. And recoveries are “characteristically lumpy.” Some parts of the economy recover faster than others. As a rule, it’s two steps forward, one back.
“Most recent business cycles have included at least two meaningful growth scares — a period when investors fret over the recovery stalling,” he adds. In 2004, for example, a flurry of weak economic data sent the S&P 500 Index reeling for almost six months.
At the same, Fed chairman Alan Greenspan was warning that higher oil prices (they had just pushed above $30 a barrel) could further stunt the economy. Guess what. It recovered anyway.
So far in 2010 we have seen a similar barrage of negative headlines, from weaker-than-expected U.S. housing data to China’s decision to put the brakes on domestic lending. These have “taken up inordinate time and space in the media,” complains Mr. Gue.
Heck, there’s even more negative news if you want it. How about Washington’s proposed tax on the big banks?
But there’s also good news out there. The Conference Board’s Leading Economic Index, one of the more reliable predictors of the economic future, was up 1.1 per cent in December 2009, well above the expected 0.7 per cent. That was the ninth consecutive monthly increase.
What’s more, corporate earnings, which rose mostly due to cost cutting in 2009, are beginning to show real revenue growth, says Mr. Gue. There is no evidence that either the U.S. or the global economy is headed for a double dip recession, or even a major stall, he insists.
“Just as in 2004,” he concludes, “I’ll regard any correction in the S&P 500 as a buying opportunity, not a reason for panic.”
He duly presents four buying opportunities.
Four global growth stocks
The first growth opportunity comes from a sale of assets. Brazilian agribusiness giant Bunge (NYSE-BG) is selling its fertilizer business to Vale (the big metals firm that also happens to own Inco). Prospects for the fertilizer business may be good, but it’s been a volatile business for Bunge.
It is getting a generous price for those assets and can now concentrate on its main oilseed business, which “should benefit from a rebound in global demand for edible oils this year,” says the editor.
Bunge is a buy up to US$76. It trades at $60.90 and pays no dividend.
Credit Suisse (NYSE-CS) has not escaped the shock waves that have hit the big banks. And it may not elude the bank taxation plan either.
“But the investment case for Credit Suisse revolves around its market-leading private client division,” says Mr. Gue. It’s a buy up to US$67. It trades today at $46.43 and yields 0.2 per cent on a small $0.09 dividend.
Another big bank, India’s HDFC Bank (NYSE-HDB) has been pulled back by the global growth scare, the editor tells us. But its recent results look positive.
Bad loans have fallen off and the growth of good loans will accelerate along with the Indian economy in 2010, he states. This bank is a buy up to US$140. The shares are at $123.67 and there’s a yield of 0.5 per cent on the dividend of $0.28.
Oil services stalwart Weatherford International (NYSE-WFT) disappointed the Street with its latest quarterly earnings and the stock fell.
But the trouble came from start-up costs on international projects and weather delays. The broader outlook is good, says Mr. Gue. “I expect the company to be able to exceed expectations by a tidy margin this year.” Buy it under US$25, he says. It’s at $17.01 and pays no dividend.
The market is sure to react to further scares, this editor believes. But investors who let the headlines force their hand will be throwing away good opportunities. Smart investors will be there to pick them up.
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