World's Safest
Growth Stocks
World's Safest
Growth Stocks
by Stephen Leeb, Editor
Personal Finance
We're predicting growth, not recession. If that's your view, then
this half dozen are the best stocks you can buy, especially at today's prices.
Recent
signs that the Federal Reserve now views recession not inflation as Public
Enemy No. 1, point to a strong recovery in stocks, especially those that
have been most battered by recession fears.
Further,
the Fed's commitment to fighting recession has sharply weakened the dollar
and set the scene for a comeback by companies hurt by the dollar's strength.
The six stocks in the table are beaten down by one or both of these forces.
Along
with other growth beneficiaries, these gems are now set for an explosive
recovery. Moreover, these stocks in our table aren't just one-way bets.
Each has superb defensive characteristics, which assure they'll survive
and prosper even if the economy, contrary to our expectations, flounders.
Major
market declines are caused by fears of recession, whether those fears are
justified or not. In the past, such fears have always been exacerbated by
rising interest rates and rising inflation. The recent market decline is
unusual because it's the first to occur in the absence of those pressures.
This time around, investors' fears centered around foreign shores and highly
leveraged economies and financial markets.
The
Fed's response has been equally unusualto put its foot on the accelerator
when money supply was already growing rapidly. Money growth is already about
as fast as it has been in the postwar period.
No
recession in this century has come on the heels of sharply rising money
growth. That means the recent market decline will be a great buying opportunity.
In the aftermath of major declines that aren't followed by recession, big
cap stocks gain on average 25 percent in the following months; smaller cap
stocks gain even more.
The Docile Dollar
Lower
U.S. interest rates and a total commitment to growth in America mean the
buck will continue to weaken. The dollar has already given up much of its
previous gains.
Of
course, the weaker dollar won't just benefit particular companies hurt by
our rising currency. It also will be a boon to the beleaguered developing
countries in Asia and Latin America.
The
combination of a weaker dollar and strong U.S. consumer demand will mean
these recession-torn countries will get a double shot in the armgreater
sales and more dollars for each unit sale.
While
developing countries have been producing more during the past 12 months,
they've been getting less for what they produceda major reason they've been
slow to recover.
The
price we may pay for stronger worldwide growth will be higher commodity
prices and perhaps higher inflation. But that's a small price for big investment
gainsespecially when you can get them in stocks with little downside risk.
Let's review our magnificent six.
A Trio of Titans
We
start with three of the surest long-term winners aroundCoca Cola (NYSE
KO) and Disney (NYSE DIS), both of which are Growth Portfolio holdings,
and Gillette (NYSE G). Each has been hard pressed by slower international
growth and the strong dollar. but these short-term problems are nothing
in light of the long-term positives that auger superb gains for all three.
As
a rule of thumb, when great stocks fall 30 percent or more and long-term
growth prospects have remained intact, you should buy. There may be more
downside risk, but anytime you can buy into a sure long-term uptrend at
a level 30 percent or more below a stock's high, grab it.
Coke
has the weakest near-term prospects but fundamentally it's the strongest
company in the world. Profits will likely decline in the second half of
the year, causing it to post its first full-year decline since the 1970s.
With over 70 percent of the company's business abroad, the culprits are
slower worldwide growth and a strong dollar.
Coke's
response has been to step up spending in its depressed marketsto use the
moment as a chance to gain market share and to further entrench its market
position.
Long-term,
with the company's extraordinary return on equity of nearly 50 percent,
it has the wherewithal to efficiently distribute its products to a world
market at a big profit. Though the stock's valuation in terms of earnings
still is rich, viewed in terms of free cash low, the stock is close to bargain
levels.
Though
Coca-Cola could drift as low as 50, long-term players should buy aggressively
up to 65.
The
factors that have driven down Coke have also affected Disney and Gillette.
Because these two offer a broader product selection than Coke, they are
less dominant and less profitable. But each is an enormous force and long-term
growth for each is nearly assured.
Exceptional
management, unmatched distribution channels and the magic of their names
are advantages no other competitors can match. Gillette's recently introduced
Mach3 razor, for example, promises to boost growth by several percentage
points over the next three to five years.
Disney's
recent alliance with Infoseek gives the company a prominent role in the
future of the Internet and another broad-based vehicle through which to
distribute its products.
For
each, slow growth in 1998 should be followed by rapid acceleration thereafter.
With each stock trading near decade-low valuations, near- and long-term
potential dwarf risks. Buy Gillette up to 45 and Disney up to 30.
More Guts, More Glory
The
remaining three recommendations are small and more aggressive.
Superb
management and high levels of profitability point to outsized growth for
each and steep stock uptrends for many years to come.
Gartner
Group's (NYSE IT) recent weakness
is more a case of guilt by association than a sign of any meaningful change
in fundamentals. Gartner is the leading information provider of computer
and information technology. Nearly 90 percent of major firms subscribe to
its services compared with less than 30 percent for the nearest competitor.
Two
factors point to continued annual growth in the 25 percent area. Information
technology as a percent of revenues will continue to grow and will likely
represent over 9 percent of corporate revenues by 2000, compared with less
than 6 percent in 1995.
Equally
important, computer technology is becoming increasingly difficult to master
without expert advice and assistancethe Year 2000 problem is a prime example.
With
no debt, abundant free cash flow, a price-to-earnings ratio less than its
long-term growth rate and down more than 40 percent from its high, Garner
Group is an aggressive buy up to 30.
Ionics
(NYSE ION) is the leading player
in water technologies. The company's services range from bottled water to
ultra-pure water for semiconductor manufacturing to desalination and waste
water treatment.
In
fiscal year 1998, severe weakness in the semiconductor equipment market
and the strong dollar will result in the first yearly drop in profits in
more than a decade. But a record backlog points to a strong recovery in
1999.
More
important, rising long-term demand for water means strong growth for desalination
and waste water treatment services. Moreover, a growing awareness of pollution
and a rising health consciousness will boost long-term demand for bottled
water.
The
stock is more than 40 percent below its high, and the current valuation
is by a wide margin at a decade low. While near-term risks are the low 20s,
long-term potential is several times the current price. Buy Ionics up
to 30.
During
the 1990s, corporate profitability has risen sharply. Technology gets some
credit, but outsourcing has probably been more important than any other
factor.
One
example of outsourcing is temporary staffing, which has grown to 2 percent
of total employment from less than 1 percent a decade earlier. Not surprisingly,
Manpower (NYSE MAN), the world's largest provider of temporary
employment, has experienced rapid growth throughout the '90s.
The
next decade promises further growth in the U.S. as well as accelerating
growth in foreign markets, where it currently obtains nearly 70 percent
of profits.
In
1998, growth was interrupted by start-up costs in France and the strong
dollar, which turned strong unit growth into much smaller dollar gains.
The stock's 50 percent-plus drop is way out of proportion to these one-time
problems. Currently trading at its lowest valuation since its public
debut in 1990, Manpower is an aggressive buy up to 27.
Editor's
Note: Stephen Leeb is editor of
Personal Finance, P.O. Box 3808, McLean, VA 22103, 1 year, 24 issues,
$69. Timer Digest recently rated Stephen Leeb among the Top 10 Intermediate-Term
Stock Market Timers for the two, three, five and eight-year timeframes.
The same publication ranks Leeb among the Top Five Bond Timers for the two
and three-year periods.
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