Hot stocks for 2009
Plenty of words come to mind to summarize the stock market last year. But which one does it best? “Brutal,” says Frank Jolley, president of Jolley Asset Management in Rocky Mount. “Unfortunate,” says John Woodard, president of Woodard & Company Asset Management Group in Advance. “Fascinating,” says Bobby Edgerton, president of Capital Investment Counsel in Raleigh and possibly a fugitive from the planet Vulcan.
Only Mr. Spock’s emotionless kinfolk, it seems, could ignore the pain and find chin-stroking allure during the 12 months that ended in October: The Dow Jones industrial average tumbled 39%, the state’s second-largest bank stumbled to the brink of bankruptcy, and investors fumbled billions in market value. In December, the National Bureau of Economic Research declared, to no one’s surprise, that the U.S. economy had fallen into recession a year earlier.
Here’s how bad it was. Though Edgerton won Business North Carolina’s annual stock-picking contest, the three Tar Heel companies he picked took a beating, plunging 23.2%. That was enough to best Jolley by less than a percentage point. As for the other three investment pros, they got whipped by professional-wrestling great Ric Flair, whose picks posted an average total loss of 46.1%.
But there was plenty of chagrin to go around. No stock that anyone picked gained value. Edgerton came closest with Charlotte snack maker Lance, which slid just 5.6%. Many stocks were still dropping when the contest mercifully ended. That’s bad news for many investors, but the low prices could be an opportunity for those with money to spend and a stomach for risk. It explains the market’s appeal to Edgerton. “You’ve got these wonderful companies that have built incredible franchises that are getting richer every year. And the stocks are going down, probably way below any reasonable valuation.” But how do you spot the bargains? “Balance sheet first, always. A lot of money, no debt — you don’t go broke and you can get through the tough times.”
Our contestants this year were forced to make their choices when it wasn’t unusual for the Dow to fall or rise several hundred points — and sometimes both — in a single session. Stocks that looked good in late October would soon lose their luster. Our stock pickers don’t have the option, as they do in real life, of changing their minds — and portfolios — during the year. “I was just trying to pick things I don’t think are going to hurt people,” Jolley says.
He expects grim corporate earnings through at least three quarters of 2009 but says the picture might brighten for investors much sooner. “The markets tend to discount nine months ahead of time. So my guess is we’ll have an inflection point sometime in the first quarter, where the markets start to anticipate better times ahead.”
2009 Stock Picks
- Bobby Edgerton
- Capital Investments Counsel Inc. —
Duke Energy Corp.
The disastrous tenure of Richard Priory, in which the stock and the balance sheet were weakened, is a bad memory. The 6% dividend looks safe. Debt has been cut in half, and busi- nesses continue to be attracted to the Southeast. Duke generated over $3 billion in cash last year. Its unregulated business is solid, and two plants under construction bode well.
Krispy Kreme Doughnuts Inc.
The very capable Jim Morgan has assumed control of this venerable North Carolina company. Its greatest asset is great-tasting doughnuts sold here and overseas. Krispy Kreme should generate positive cash flow for years to come. Its market value is extremely small as a percentage of revenue.
This stalwart grocer will generate more than $200 million in cash flow in fiscal 2008 with manageable debt. Harris Teeter stores are well-managed and well-located. They’re concentrated in cities such as Charlotte and Raleigh near people who will not be hurt by mortgage debt. Expansion plans roughly equal cash flow. Bank debt is minimal compared with fixed debt, a positive if interest rates rise.
- Frank G. Jolley
- Jolley Asset Management LLC — Rocky Mount
Pharmaceutical Product Development Inc.
PPD provides a broad range of research and consulting services for the pharmaceutical and life-sciences sectors. The stock is trading at around 14 times expected earnings of $2 per share for 2009. The balance sheet is pristine, with cash and equivalents of more than $600 million and no long-term debt. The price is down 37% from its annual high of $49.39. This defensive pick should fare well over the coming year.
Reynolds American Inc.
Reynolds is the second-largest producer of cigarettes in the U.S. Brands include Winston, Camel, Salem, Doral, Vantage and Pall Mall. The stock is trading at less than 10 times the 2009 earnings estimate of $4.85 per share. The dividend yield of 7.2% should provide downside protection for the stock and excellent total-return potential. The current price of $48.98 is down approximately 32% from its 52-week high of $72. This repeat pick from 2008 should do well despite a slower economic environment.
Ruddick has two major businesses — Harris Teeter grocery stores and industrial-thread maker American & Efird. It is trad-ing at approximately 12.5 times estimated 2009 earnings of $2.30 per share. The noncyclical nature of food retailing should be a positive in 2009. The price is down 28% from its 52-week high, creating an attractive entry point.
- Alexander B. Miles
- Managing director
- WealthTrust Advisors Inc. —
Cable maker CommScope provides solutions for wireless networks and cable broadband connectivity, two global end markets with strong long-term growth trajectories. Recent market uncertainty relating to the global slowdown and the postponement of new enterprise spending by many businesses are adversely affecting the company. Management has demonstrated an ability to execute through challenging times. The company generates solid free cash flow, with a 2008 yield of about 30%. While I expect the economy to remain weak through 2009, this company is attractive below $14.
FairPoint Communications Inc.
Fairpoint Communications is the eighth-largest incumbent wireline carrier in the U.S., with most of its customers in Maine, New Hampshire and Vermont. The company has growth opportunities in expanding broadband access to its largely rural markets. It will maintain an extraordinary dividend yield, provided debt convenants are not breached during the economic slowdown. This is a highly speculative opportunity that carries significant upside, although with some risk of insolvency if the credit crisis deepens and lengthens. Investors should be wary of a suspension of dividends.
SPX had a strong liquidity position going into the end of 2008, with an estimated $862 million after funding outstanding dividend, working capital, debt expense and share repurchase targets. The global credit crisis has put a drag on the ability of SPX customers to access capital and may cause delays, if not outright cancellations, of backlogged and new projects. Yet, at current price levels below $35 — producing a contraction of more than 75% of its price-earnings multiple from 2007 to 2008 — the stock has discounted much of the uncertainty and looks poised to rebound during the second half of 2009.
- William Mitchell
- Certified financial planner
- Southeast Investments NC Inc. —
BB&T has navigated the financial crisis of 2008 with an eye toward proper risk management. Infused with $3.1 billion in capital from the federal Troubled Asset Relief Program, the bank is well-positioned to participate in the recovery of a much-consolidated banking system. With a 52-week high of $45.31 and a healthy yearly dividend of 5% or more, BB&T offers significant appreciation potential in the wasteland that is the banking sector. Management has proven its value to shareholders.
The worldwide plunge of commodity prices, most notably steel, has provided investors an opportunity to accumulate a top steel producer at prices not seen since 2005. With a share price on Oct. 31 down more than 50% from its 52-week high and sporting a dividend yield of more than 3%, Nucor should produce growth and yield at a reasonable price. Commodity prices have already discounted a worst-case scenario for the world economy. Any stabilization will be positive for Nucor shares. Furthermore, the federal government is planning significant infrastructure expenditures for 2009 and beyond. These will require large amounts of Nucor products and add to earnings.
This company develops and manufactures semiconductor materials and devices, primarily those with light-emitting diodes. It operates in a very competitive industry but is well-situated to participate in the green-technology revolution. LED technology is highly efficient and can be used to replace the nearly 4 billion light bulbs now used nationwide. Cree boasts annual sales of $500 million and growth of 24%. Earnings have suffered due to high expenses and knocked the share price off more than 50%. Growing pains are terrible but also provide good entry points for investors focused on the future of alternative technologies.
- John Woodard
- Woodard & Company Asset Management —
For the third year, this company has been on my list of stocks to buy. It’s a leading designer and manufacturer of coaxial and fiber-optic cable for data and video communications. Sales have more than doubled over the past year, primarily through acquisitions and the growth of foreign sales. I expect CommScope to post strong results in the coming quarters, and the difficult market environment has priced the shares attractively.
Pharmaceutical Product Development Inc.
This global contract-research organization provides drug-discovery and -development services, post-approval expertise and compound-partnering programs. The biotech industry has immense potential for opportunity, a technology that not only improves but saves lives. This company is debt-free and has a strong balance sheet and a good dividend. Earnings growth has been consistent, and EPS should rise 25% in 2008.
Duke Energy Corp.
In this difficult market environment, any stock with attractive dividends and price stability provides immensely valuable characteristics for your portfolio. Duke has nearly 4 million electric customers in North Carolina, South Carolina, Ohio, Indiana and Kentucky, as well as half a million natural-gas customers in the Midwest. Earnings should be higher in 2008 and 2009. It should benefit from an expected drop in commodity and energy prices, as well as rate relief in Ohio. The dividend yield stands at a nearly 6%, with potential for dividend growth in the coming years.