weiwentg (98.29)

Free fall has ended, but that doesn't mean a quick recovery

August 02, 2009 – Comments (0)

After the latest round of economic data and corporate earnings, I think most analysts agree that the US economy isn't in free fall any longer. The Congressional Budget Office seems to think that a recovery (positive GDP growth) should begin in the last quarter of 2009.

None of this means a quick recovery, unfortunately. The banks have their capital and loan performance issues to work through, and lending will be constrained. This impairs access to capital for corporations and individuals. It also means that economic growth will be limited, although when the infrastructure projects funded by stimulus money get started, economic growth should be positive.

Stock market returns over the next few years will most likely be limited. I dream of being in a stock market bubble and getting out just at the right time, but no one can accurately time the market in this manner over the long term. 

Typically, small cap stocks and lower quality stocks lead rebounds. I think we've clearly seen the lower quality stocks leading the market to date. Going forward, I'm looking to invest mainly in the highest quality large caps. My top picks in the blue chips include Berkshire Hathaway, Procter and Gamble, Novartis, Johnson and Johnson and Paychex. I own all of these.

There are a number of mid-caps I like that I think have sustainable competitive advantages. Here, I like Compass Minerals, Enterprise GP Holdings, Energy Transfer Partners or Energy Transfer Equity (ETE is the GP and it has more debt than ETP, you can take your pick but I own ETE), Monsanto and Western Union. I also like Mastercard and Intuitive Surgical very much, but both these stocks are not at my buy price. I own all of these except Mastercard (and I used to own that one).

I've also been wondering if high-yielding securities like utilities, high-quality REITs and some preferreds may be a good investment. These won't grow their dividends much (and preferreds won't grow their dividends at all). However, in a low-return world, if you can get a high current yield in a security that won't cut its dividend, you will beat the market barring hyperinflation. For utilities, I'd recommend Westar energy. For REITs, I'd buy Realty Income under $23 (I own the stock).

For preferreds, I'm still looking. They are higher on the capital ladder, and trust preferred issues of banks are essentially bonds that trade on stock exchanges. However, I don't see any of the high quality banks with trust preferreds that I'd buy right now. I would prefer to buy under par, and I would want a current yield of at least 10%. I wish I'd bought USB's, BBT's or TCF's trust preferreds earlier in the year, but all are trading pretty close to par.