Two cheap US stocks to buy now
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David Stevenson Aug 06, 2009
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If you're an investment banker or a car dealer, life in America probably isn't too bad right now. Goldman Sachs, the uber-investment bank, is coining it in. And the US government's 'cash for clunkers' programme is boosting car sales.
But for most of the rest of the US economy, the recovery isn't really happening. And what little good news there is probably won't last.
In other words, there's a lot of disappointment building up for Wall Street. But for now the stock market just keeps on rising - which is why defensive stocks look an even better bet than before...
Goldman Sachs seems to operate in a different financial universe. It made more than $100m in trading revenue on a record 46 separate days during the second quarter of 2009, says Bloomberg, breaking the previous high of 34 days in the previous three months.
The car sales recovery isn't a sign of good news to come
Of course, with markets rebounding sharply since March, maybe it's not that surprising. Yet out here in the real world, the country's carmakers are also feeling a bit brighter, too. Is this a sign of good news to come?
Sadly not. The car sales recovery is a bit of a fiddle – they can now cadge government money to help them sell more vehicles in the 'cash for clunkers' (C4C) programme. The trouble here is that firstly, US taxpayers have to pick up the tab, and secondly, it's a one-off. There's a limit to how many old crates people can trade in. And when they've bought their new car, they won't be in the market for another for quite a while. So C4C doesn't increase demand, it just brings it forward.
Indeed, this sums up the US economy right now. The government has been happily splashing taxpayers' cash around and printing a lot more of the stuff – so there are bound to be some effects. But they aren't set to be either very helpful or long-lasting.
"There's tremendous fiscal largesse" – i.e. the US government is spending much more than it's collecting in taxes – "associated with this economic turnaround", says David Rosenberg of Gluskin Sheff, "but it's the same problem as the first little pig had in fending off the big bad wolf. Straw will only hold up for so long".
In other words, Americans won't get that much bang for all those bucks that are being spent. Just look at the stream of weak economic indicators. You'd be forgiven for finding all of these a bit overwhelming, so it's handy that financial forecaster Capital Economics has put together its own Recovery Index (CERI) of 28 of the most important measures.
The US recovery will disappoint
So what's the bottom line according to CE? Well, the economic recession, technically at least, probably ended in June. But for US citizens who don't work for Goldman Sachs and who don't make cars, there's not much to be cheerful about. For example, job losses may be slowing, but private payrolls still dropped by another 371,000 last month, says the ADP National Employment Report. And overall disposable incomes have fallen in three of the last five months.
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"Recessions triggered or accompanied by financial crises tend to be followed by weak, protracted recoveries", says CE's Paul Dales, "and we doubt that it will be any different this time. The US recovery is unlikely to be strong, and is likely to disappoint".
Rosenberg reckons it will be "a one-quarter wonder, not unlike the 2002 first quarter experience with a flashy bear market rally, and a brief inventory and stimulus-led rebound in growth". As he points out, "there are still too many uncertainties associated with the outlook for the economy, corporate earnings, financial stability and fiscal rectitude (or recklessness is more like it)".
Meanwhile the housing market still looks very sticky. "Conventional wisdom dictates that the US housing market – the 'harbinger of global credit' – holds the key to economic recovery on both sides of the Atlantic", say Jon Bell and Gavin Jago at Shore Capital. They reckon that "the worst is now over" – probably not surprising after a near-36% fall from the peak – and that the market should start to stabilize from here, although news flow will remain "mixed."
However, we wouldn't be keen to pile into US property just yet. There's still a good chance that more problems could pile up here. Even 'prime' borrowers – i.e. supposedly top-notch – are finding repaying their home loans much harder, says the FT. Job losses and falling prices have pushed up the number behind with their payments by 14% in just three months.
The economist Nouriel Roubini, who's called the recession well so far, reckons the US, along with Europe and Japan, still faces the chance of a double-dip recession due to all that government borrowing. If central banks continue to print money to cover it, "long-term bond yields may go higher", as investors demand a higher return in case inflation returns. This would "crowd out the economic recovery leading to a double dip", he says. "I'm very cautious about the United States".
How to invest during this rally
Yet the stock market keeps on rising, as if everything will soon be 'back to normal'. Many investors who were on the sidelines have been caught out by the speed of the rally. They don't want be seen to be 'missing out' on what they fear could be a new bull market, despite the economic bad news. Or they've seen analysts raising forecasts on company earnings, and worry that this might prompt a further surge in share prices.
Our view hasn't changed on all this. If you have an appetite for speculation, then as my colleague John Stepek suggested on Monday (Don't buy a tracker - stick with defensive stocks), you could play the broader market with spreadbetting (but set a tight stop loss).
But as far as individual stocks go, we'd stick with defensives. These don't depend half as much on economic growth for their profits, and they have been left flailing in the wake of "recovery" stocks, so even if the market tanks in the next few months, they shouldn't suffer too badly.
Here are two of our picks that so far haven't done much at all. Telecoms company Verizon (NYSE: VZ) (see Eoin Gleeson's article from June: Cash in on America's telecoms monopoly) is on a forward p/e of 12 times and has a yield of 6%, while America's biggest tobacco group Altria (NYSE: MO) (see our article from May: How Big Tobacco will benefit from US anti-smoking laws), better known as Philip Morris, is on 9.4 times next year's net profits, with a prospective yield of almost 8%. Both look cheap to us, and with dividend yields that size, you can afford to park your money and get paid while you wait for capital gains.
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