Where to Invest 2010

in Investing,Market News

Heading into 2010 most financial analysts and investment pros seem to agree on two things: We’re no longer on the brink of another Great Depression, and there won’t be another 60  surge in the stock market anytime soon. Beyond that, things get a little hazy.

Barely a year after the stock market and the economy pulled back from the brink of collapse, there’s no consensus about what might be next. Some fund managers are upbeat (see our Annual Investor Roundtable on page 50), while others fret about everything from the dollar to higher taxes. As of now, many analysts say stocks overall are neither particularly expensive (the bear market took care of that) nor very cheap (the 2009 rally has seen to that). This means stocks need to get pushed by something from the outside, and many experts believe there’s no more important pusher these days, for good or for ill, than the overall health of the U.S. economy.

The idea that the fortunes of the broader economy heavily influence stock prices is one many professional investors don’t normally want to believe. These so-called bottom-up investors say a good stock will shine under any circumstances. And there have been many years when the economy seemed disconnected from the stock market. In 1991 the U.S. gross domestic product, the broad measure of the nation’s economy, fell 0.2 percent, but stocks went up. In 2002 the economy rose at a 1.8 percent clip, while stocks lost more than 20 percent. But living through a market meltdown has made even rough-and-tumble investors rethink their investment philosophies. David Einhorn, who manages about $5 billion as the president of Greenlight Capital, used to scoff at thinking about data such as unemployment levels or factory utilization rates before making a trade. Then home builder MDC Holdings, one of his picks, tanked in the housing bust. Now before he buys or bets against a stock, he pays attention to what the broader economy is doing.

The problem, of course, is that no one knows which way the economy is headed. Indeed, there’s a cottage industry among analysts and pundits to describe its direction using shapes (V-shaped, W-shaped and square-root-shaped are recent favorites). James Paulsen, chief investment strategist at Wells Capital Management, thinks the economy is on the mend. “We are on the flip side of fear,” says Paulsen. On the flip side of Paulsen is Jerry Jordan, who is buying stocks that may fare well if the economy deteriorates. Jordan, who runs the $118 million Jordan Opportunity fund, says he can’t be optimistic when he reads reports showing a sluggish manufacturing sector. Then there’s the “new normal” crowd of analysts, who believe the U.S. economy will, at best, plod along. Much as we did in our “Where to Invest” story last January, we’re hedging our bets. And since there are three basic ways the economy could go in 2010, there are three ways to approach investing. Here are stocks that can capitalize under each scenario.

The Recession Returns

The Premise: Unemployment is high, consumers are still loaded with debt, the government’s budget deficit is soaring—all ingredients for a return to a recession, some analysts contend. The best stock defense in a recession, say some pros, is to go with big companies that sell goods worldwide and don’t necessarily need an economic rebound to make money.

Goldcorp (GG: 39.34, +0.39, +1.00%)

Believe the country is headed for inflation? Buy gold. Expect another deflation scare is in the offing? Buy gold. Think the budget deficit jeopardizes the dollar’s future? Buy gold. It’s the insurance of choice because “it checks all the boxes” for potential risks, says Rachel Benepe, manager of the First Eagle Gold fund.

Analysts say midsize miner Goldcorp combines a strong balance sheet with the potential to capitalize on bad times. The company has been developing the Penasquito mine in Mexico, and it is also building out a mine in Ontario, Canada, next to an existing mine—“huge projects” that offer big opportunities, says Benepe, who owns the stock in her fund. Goldcorp also has some of the lowest production costs in the mining industry and a healthy enough balance sheet to pay a modest dividend.

To be sure, owning miners is often riskier than owning gold outright, because mining shares can get clobbered when projects get delayed, and a small move in gold’s price can have a huge impact on a miner’s profit margins. But for now, gold and gold miners are a way to hedge against the economy deteriorating. The odds are that U.S. officials are not going to get everything right in managing the recovery, says Ed Yardeni, chief investment strategist of Yardeni Research.

Coca-Cola (KO: 57.00, -0.68, -1.17%)

The way Don Hodges sees it, Coca-Cola has it all: a healthy dividend, an expansive international business and an attractive stock price. “We’ve reached a time where we should see a nice steady appreciation for stocks like this one,” says the comanager of the Hodges Blue Chip 25 fund, who has been buying Coke for his fund.

Coca-Cola stands to benefit from a weaker dollar and a decline from the peak commodity prices of 2008. But its shift toward more noncarbonated beverages such as Vitaminwater is also paying off, says Edward Jones beverage analyst Jack Russo. The company’s ability to generate lots of cash allows it to keep growing even in a difficult economy. And the company will use some of that money to expand abroad. Muhtar Kent, Coke’s CEO, has told analysts the company plans to invest $2 billion in China in the next three years.

Procter & Gamble (PG: 60.63, -0.74, -1.20%)

Recession or not, Procter & Gamble plans to add 1 billion new customers over the next five years. In other words, more than three times as many people as the U.S. population could add purchases of Crest, Tide or Pampers to their routine in the coming years.

The Cincinnati-based firm struggled over the past year as competition from private labels ate into sales. But “things are beginning to turn in their favor,” says Todd Jones, consumer goods analyst at Legg Mason Investment Counsel, which owns the stock in some accounts. A weak dollar and the sale of its pharmaceuticals unit has freed more than $3 billion in cash, giving P&G a cushion as it cuts prices and woos thriftier shoppers. CEO Robert McDonald told analysts that P&G is investing in new products and brand extensions, such as Oil of Olay products in Asia. “I see plenty of reasons to get excited,” says Jordan Smyth, managing director at Edgemoor Investment Advisors, who has been buying the stock.

Abbott Laboratories (ABT: 53.99, -0.55, -1.00%)

Health care stocks have plenty of question marks surrounding them. Some drugmakers have major drugs losing patent protection; others’ profits may be hurt by cuts in Medicare reimbursements. But Abbott should manage to avoid many of these problems: More than half of its $29 billion in sales come from outside the U.S.

Meanwhile, the company has used its cash to make several acquisitions. The biggest—a $6.6 billion deal to buy the drug division of Belgium’s Solvay—makes Abbott a player in the vaccine business. Executives told analysts this fall that the Solvay drug unit will add $3 billion in sales to the company in 2010. And even in an economic downturn, people still get sick, a fact that should keep Abbott’s sales strong. The stock trades at 13 times estimated 2010 profits and sports a 3 percent dividend yield.

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