Summer is here, recovery is coming soon.
Despite a pause this week, stocks are approaching the pole for the second quarter of the year with commendable speed. As predicted in my last column, this continuing momentum finally pushed the Dow Jones Industrial Average ahead for the year, bringing on the equally predictable blathering from televised market commentators.
This momentum should continue, probably pushing the Dow through 10,000 by year-end. Why not? Despite the recent rally, the market is still where it was eleven years ago. Since then, the global economy suffered its most severe buffeting in generations. It is starting to recover.
IHS Global Insight, a very respected forecasting firm, just published in USA Today a new Economic Outlook Index that comprises 11 “forward-looking” indicators, differing from the widely followed Conference Board unweighted index of both coincident and predictive indicators. The IHS index reflects increasing evidence that the current recession is likely to end in September with a mild recovery beginning in October.
Stock market action is consistent with this forecast. There are obviously many bumps on the road to recovery as well as many companies who will never recover from the recent exposure of their flabby balance sheets and their overpaid incompetent managers. Nevertheless, better times lie ahead for quality companies and competent investors.
IHS, formally Information Handling Systems (IHS-$48) is an example of a forward-looking company whose information products will develop increasing demand under competitive pressures from a resurgent global economy. Based near Denver, it provides customers in more than 180 countries with up-to-date information on energy, environmental, economic, defense and security issues. Its brands include Herold and Cambridge Energy, Global Insight and Jane’s, the venerable worldwide provider of military and naval intelligence.
Its sales are $880 million, growing at almost 20% annually. Earnings are keeping pace, recently reaffirmed by IHS at $1.85-$1.88 for 2009, a PE ratio of 26. The company has modest debt but like many tech companies, no dividend. With investors still so fearful, P/E ratios remain low but will inevitably expand as confidence returns. Even though patience will be required, investors should continue to add future gains to their portfolios with other attractive growth stocks ranging from IBM (IBM-$108) to Google (GOOG-$416), Stericycle (SRCL-$49), Qiagen (QGEN-$17), Gilead (GILD-$44), Applied Signal (APSG-$25), Life Tech. (LIFE-$39) and Cerner (CERN-$58).
McAfee (MFE-$39) is a promising addition to this group. The world’s largest dedicated security technology company may be better known to many investors for its security systems for home users, but most of its sales come from businesses, government and service providers. It operates worldwide with sales of $1.6 billion, growing at 11%.
Earnings have slowed with size and the global recession but will be up at least 11% this year to around $1.85. This is a reasonable valuation for a company with steady above average growth in a vital sector. Debt is quite modest and prospects are excellent. It announces earnings on July 30 and its recent strong chart pattern suggests good news ahead.
For dividends, Verizon (VZ-$30) yields over 6%. It has the biggest wireless network in this country, widely viewed in consumer polls as the best. Verizon will be offering the Palm Pre, new Nokia phones and probably Apple’s iPhone. It will probably earn bit more than $2.50 this year, about the same as last, but a good performance in this economy and a reasonable P/E.
Stocks in the much-publicized auto sector lack appeal. People everywhere want wheels but this demand has led to global capacity of over 90 million cars annually against demand of only 60 million even in good times. If Detroit had spent more effort in improving its products and less lobbying for government protection things might be different. As it is, China will pass the USA in annual sales by 2015. In 2007, they already pulled ahead in total carbon emissions.