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Get Four
|  | DECEMBER 27, 2004
A Year for Savvy Stock-Picking With only modest gains likely in the market in 2005, BusinessWeek's Marcia Vickers says investors should focus on strong companies The watchword for investing in 2005 will be "quality." That's a key to the advice contained in BusinessWeek's annual Where to Invest issue, according to Marcia Vickers, senior writer for BusinessWeek, who wrote the introduction to the yearend package. It won't be a "blockbuster" year, Vickers reports, with the magazine looking for a 2005 gain of around 8% for stocks. For the best results in the year ahead, Vickers suggests looking at "stocks that are trading at a discount to their peers, that are growing dividends, that are cash-rich, and that have strong balance sheets." And some such stocks are currently trading at a discount to the overall market, notably some of the names in utilities, consumer staples, and "even some growth-oriented stocks like General Electric (GE )." Vickers points out some other interesting niches such as Internet advertising and alternative energy. And stocks in Brazil, China, India, and Russia are worth a share of investment money, she says, although in most cases such money should go into mutual funds focused abroad to minimize the risks. These were a few of the points made in an investing chat presented Dec. 21 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword: BW Talk. Q: Before we look ahead, Marcia, how about that stock market right as of now? Looks as if it's going into Christmas with bells ringing! A: Yes, it certainly has looked good the last week. We've had a number of mergers that have been announced, and you had, for instance, today Morgan Stanley (MWD ) and Bear Stearns (BSC ) announcing that their quarterly profits rose. Those things have been very bullish for stocks in recent weeks. Q: There are all kinds of angles to the outlook, but how would you sum up the prospects for 2005 as BW sees them? A: Well, we don't think 2005 is going to be a blockbuster year in the stock market. We think that when all is said and done, the market will end up next year around 8% or so. Of course, that's not bad, but it's not great. So we have a number of areas where you should look if you want to try to beat that. Q: What are some of BW's suggestions for beating that 8% number for the broad market? A: Well, first, the key word that we're using right now is to be in "quality" stocks. That can sound a bit boring, but actually, it's not. What we mean is to invest in stocks that are trading at a discount to their peers, that are growing dividends, that are cash-rich, and that have strong balance sheets. A lot of these are trading at a discount to the market, especially when you look at utilities, which have a healthy, steady dividend, some consumer staples companies that have strong dividends and good balance sheets, and even some growth-oriented stocks like General Electric, for instance. Q: What about the financial sector for 2005, with interest rates going up? A: A lot of people think that simply because interest rates are rising, it's going to be bad for financials, but if you really want to make a smart contrarian bet, you might want to invest in some quality financials right now because some of them are trading at really decent valuations. For instance, Citigroup (C ) gives you the benefits of being a multinational company...and it also has a relatively low p-e of about 15, and that means it's really not too expensive. And, with people betting against the financial sector right now, it's probably a good time to buy. Also, today we saw that Morgan Stanley and Bear Stearns profits had risen in the last quarter. So many of these stocks remain not just viable, but also pretty good buys. Morgan Stanley has a 13 p-e, and Bear Stearns has an 11 p-e. Q: So will 2005 be a year more for value stocks than for growth? A: I think you have to look at both styles in 2005. Some people are saying that they're actually seeing some values within growth stocks. I know that Bob Smith at T. Rowe Price is bullish on them. Smith runs a growth fund, but he likes Microsoft (MSFT ), which is paying a really healthy dividend right now, and Dell (DELL ). He especially favors large-cap growth. But generally speaking, we think value stocks still have a way to go. And, again, you can find values at some of the consumer staples and utilities that are paying healthy dividends and are relatively cheap vs. their peers. Q: Lots of negative headlines about some big pharmas -- is it a good time to buy Pfizer (PFE )? A: I would probably take my time when I'm looking at some of these stocks right now. You can be a contrarian and say it's a good time to buy them because they are certainly off their highs right now. Pfizer's shares lost some 19% last week because of the Celebrex study. So you've got to worry about continuing headline risks with some of these pharmaceuticals. Richard Bernstein from Merrill Lynch has described them as the new tobacco stocks.... I would be a bit careful right now. Q: Will Bush's push for private accounts in Social Security have any market impact next year? A: That's hard to say. I don't think we've gotten far enough on that issue to really know what the outcome will be for the market. You can have all the talk in the world about privatization of Social Security, and Congress can put the kibosh on it.... Of course, if it does happen, it will have a huge impact onthe market -- it will drive prices up, and it will be great for many financial stocks. However, I think it's too soon to tell right now. Q: Where to look for stocks abroad? A: One of our themes in the investment outlook is investing in Brazil, Russia, India, and China. We think that it's a great time to get in on the ground floor of a major growth story. These countries will outpace the growth of the G-6 developed nations in the next 40 years. In order to take advantage of that, you might want to put a portion of your portfolio into an emerging markets fund or some of these country-specific funds.... It's best not to pick individual companies when you're looking at these markets andgo with a fund to limit your risk.
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