We're mired in the grizzliest bear market in decades. But the good news is that stocks have been marked down to holiday-sale levels. Here are ten stocks we think are poised for strong returns in 2009 and beyond.
Nobody has ever accused the folks at Altria and its Philip Morris USA subsidiary of being dummies. (A few other things, sure, but not that.) So when Altria endorsed legislation that would subject tobacco products to FDA regulation - a bill sponsored in the U.S. Senate by longtime tobacco company foe Ted Kennedy - you knew there had to be a reason.
There is. Indeed, the proposed legislation might as well be dubbed the Altria Earnings Protection Act. For starters, the bill prevents the FDA from ever banning cigarettes, but no less importantly, it makes competing with Altria much harder. The wording makes it extremely unlikely that the FDA will ever approve a new cigarette product, because the new entrant would have to be deemed "appropriate for the protection of the public health." The bill also restores states' ability to restrict tobacco advertising. Yet another part of the measure would require the FDA to crack down on sales of counterfeit cigarettes, which have been a drain on Altria earnings for some time.
The upshot is this: If the bill becomes law - and there's reason to think it will, since President-elect Obama was a co-sponsor - Altria's already safe dividend (current yield: 8.5%) will become even safer. So, too, will its earnings growth, which analysts are pegging at 8% for 2009. Throw in the fact that vice stocks are usually recession stalwarts - they've outperformed the S&P by an average of 12 percentage points during the past six recessions, according to Merrill Lynch - and you've got a defensive stock with generous upside.
By Jon Birger, Katie Benner, Stephen Gandel and Mina Kimes
Annaly Capital Management
No matter how superb its business or how cheap its valuation, a complicated stock - especially one that involves mortgages - can get hammered in a market like today's. Annaly and its 16% dividend yield (that's not a misprint) is a prime example.
Annaly is a real estate investment trust, but it's not a conventional one. The company is basically a hedge fund that uses short-term bank loans to make long-term investments in mortgage-backed securities. That may sound scary, but Annaly buys only mortgages guaranteed by government-sponsored (now government-controlled) enterprises like Fannie Mae and Freddie Mac.
CEO Michael Farrell says the biggest question for Annaly shareholders has always been whether the federal government would stand behind Fannie and Freddie's mortgage guarantees if the duo ran into trouble. "And now we know the answer," says Farrell, referring to the government's bailout of Fannie and Freddie in September.
The problem is, investors are now too scared to care about any of this. When we recommended Annaly last year, the stock traded for $17 a share, had a price-earnings ratio of nine (based on projected earnings), and offered a dividend yield of 5%. (Like all REITs, Annaly pays out the bulk of its earnings as dividends.) Today, the shares sell for $13 with a forward P/E of five and a dividend yield of 16%.
Dell
When Michael Dell returned in early 2007 to the helm of the computer maker he founded nearly 25 years ago, costs at the Round Rock, Texas, company were spiraling out of control. Worse, Dell was losing market share to rivals HP and Apple. Nearly two years and more than 10,000 job cuts later, Dell's operating expense dropped 12% in the most recent quarter, compared with an increase of 24% a year ago. What's more, the company has regained market share this year, according to research firm Gartner.
Mr. Market, though, hasn't seemed to notice. That, along with the cash on its balance sheet, is what makes Dell's shares a great buy now. The company has nearly $7 billion in net cash, or about $3.60 a share. Exclude that from its recent share price of $10, and you get a price/earnings ratio of just under five, based on next year's earnings estimate of $1.31 a share. By that measure, Dell's shares are cheaper than 95% of all the companies in the S&P 500 and significantly less expensive than rivals HP and Apple, at eight and 12 on the same scale, respectively, according to Standard & Poor's. Once the quintessential growth stock, Dell has become a value play.
Devon Energy
Do you believe oil will remain at under $50 a barrel? We certainly don't. With oil prices collapsing by $100 a barrel in the past six months, a rebound seems inevitable. After all, even if global demand were to remain flat over the next 25 years - the International Energy Agency actually expects it to increase 45% by 2030 - the world would still have to develop new sources of oil and gas equivalent to four Saudi Arabias just to offset the declining outputs at existing oilfields.
But earnings at energy companies are on average expected to drop 16.3% in the next 12 months, according to Standard & Poor's. So the question is how to take advantage of the long-term bargains without your portfolio getting stomped in '09. Devon Energy is one answer. The Oklahoma City-based exploration and production company does business almost exclusively in the U.S. and Canada, so it doesn't have to worry about Russia or some other nation deciding it wants a greater cut of oil profits. Devon's revenues are split between oil and natural gas, giving it an added cushion against oil price drops.
Earnings are expected to drop 36% in 2009. But that's much better than the 53% drop expected at Anadarko Petroleum, Devon's closest competitor. And at a recent $66, the company has a P/E ratio of ten, based on next year's earnings. That's lower than the 12 P/E of Exxon Mobil, which analysts also say is well positioned to weather the energy downturn.
Diamond Offshore
Our second energy-related stock may pay off faster than Devon. Indeed, what stands out about Diamond Offshore is its home-run potential - Barclays Capital has a $134 price target for the shares, which are now $66 - as well as the protection shareholders get from its hefty dividend should the stock market continue to slide.
Diamond is a contract driller; it has 46 offshore rigs and drill ships, which it leases to oil companies such as Apache and Petrobras. While day rates for offshore rigs have been under pressure, most of Diamond's rigs are covered by long-term contracts. According to Goldman Sachs analysts, 89% of Diamond's revenues for 2009 are already locked in (the most of any offshore driller), as are 71% of 2010 revenues. And as oil prices move back up, demand for drilling - and Diamond's services - will surge.
Diamond's shares trade for a mere six times 2009 profits, but what we really like is the yield. Unlike other drillers, Diamond distributes the bulk of its earnings as dividends. The total quarterly payout (regular dividends plus special dividends that have become quite regular) now stands at $2 a share, which works out to an annualized dividend yield of 12%.
