Fed refugees, or savers seeking to escape punishingly low interest rates by buying shares, had better choose carefully.
Since December 2008, America's Federal Reserve has kept core short-term interest rates near zero while spending richly on bonds to depress longer-term rates, too. Put euphemistically, the goal is to stimulate growth. Put cynically, it's to lavish profits on banks to prevent more of them from failing; to lure businesses and consumers into buying on credit, especially real estate; and to chase savers out of their checking accounts and certificates of deposit into the stock market, thereby creating a rally, the glow of which will brighten the mood of shoppers.
More stock screens from Jack Hough:
The plan has worked too well. U.S. share prices have doubled since March 2009. Dividend yields have plunged. Commodities have soared, too. All manner of risky securities have found eager buyers of late--even dodgy mortgages. That means investors who are just now spending bank savings to buy into the market rally risk buying high.
The safeguard against that is to pick through the stock market's bargain bins for merchandise that's likely worth more than its price. There are still good names to be had on the cheap. The three listed below have a history of stable profits, modest share prices relative to current profits and healthy dividend yields. As suggested by the stable profits, they sell things that tend to remain in demand even when the stock market stumbles and pulls consumer spending down with it.
Johnson & Johnson
Johnson & Johnson ( JNJ ) has a diversified portfolio of drugs, medical devices and consumer products. For much of the past decade, it was far too popular among growth investors to appeal to bargain hunters. No more. Shares now sell for their 2002 price, even though sales and profits have nearly doubled since then. A series of high-profile recalls affecting Tylenol, Motrin, Pepcid AC and other top-selling J & J products has hurt the shares, as has criticism from regulators for shoddy manufacturing practices. Also, austerity measures in Europe are cutting into drug and device margins, and the company is struggling along with industry peers to develop new, lucrative products. That noted, J & J still turns 27 cents of each sales dollar into operating profit, which is more than double the average for big drug companies, and its sales and profits are projected to rise this year. Shares sell for just 12 times earnings and yield 3.6%.
Kraft
Kraft ( KFT ) last quarter reported 6.5% internal sales growth, its biggest gain in nine quarters. It saw only a dribble of growth in Europe; North American sales rose 4%, led by brands like Oreo, Ritz and Maxwell House; and developing market sales soared 17%. Management expects 2011 sales to rise by more than 5%. The biggest challenge will be margins. Prices for coffee, wheat, cocoa and other ingredients have soared over the past year, while Kraft has worked to raise prices without giving up market share. Lower interest payments will help the bottom line. Kraft has reduced debt by more than $2 billion over the past three quarters. According to BMO Capital Markets, management's targeted debt-to-income ratio implies a further $2 billion reduction over the next year. Shares sell for 14 times earnings and come with a 3.7% dividend yield.
There's also a wild card: The commodity run-up over the past year has closely tracked Federal Reserve purchases of Treasury bonds, suggesting it's as much a result of investors fleeing low yields and guarding against inflation as it is due to rising food demand. If that's the case, and if the Fed halts its bond-buying spree this year as planned, the result could be a fast drop in commodity prices--and windfall profits for food makers.
Hillenbrand
Hillenbrand ( HI ) used to be part of a business combination that should prompt anyone to shed extra pounds: oversized hospital beds and oversized funeral caskets. In 2008 its predecessor company, Hillenbrand Industries, spun off its Batesville casket business under the corporate name Hillenbrand and renamed itself Hill-Rom ( HRC ) , the hospital bed maker. (The companies make beds and caskets in regular sizes, too.) Last year, Hillenbrand added to its casket business K-Tron, a maker of factory machines. The resulting $1.4 billion company, however odd its businesses may seem, combines the strong cash flow and recession resistance of Batesville and the growth and economic recovery exposure of K-Tron. Shares are little-covered on Wall Street and sell for about 13 times earnings. The dividend yield is 3.5%.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."Try our powerful Select Stock Screener to discover investment opportunities that meet your criteria.
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